Nov

25

One thing I notice in unsophisticated investor-traders such as myself is that the positions one takes are usually supported by an unspoken prediction: "I will know when it is a good time to sell this and I will be able to do so."

Gary Rogan writes: 

The beauty of really long-term investing is that you don't have to have this unspoken prediction.

Victor Niederhoffer writes: 

And to add to Mr. Rogan's "beauty", you take full advantage of the most marvelous aspect of arithmetic, the power of compounding. And furthermore, you reduce to a minimum the vig from flexionic and top feeder activity.

Anatoly Veltman writes: 

Can't dispute all of the beauty. The problem is that only a narrow group is willing to commit: those who set aside slow money. Most suffer from the "hot money" bug: how to make money work its hardest. Willing for the money to die trying.

Gary Rogan writes: 

Very poetically put. It also illustrates the following point: in any kind of investing or trading the problems and solutions come in two flavors, namely those of competence and those of psychology. Even in long-term investing you still have to decide what to buy and when to buy it, so it's not immune from either category.

S. Humbert writes: 

Buy and Hold (for the medium term) is not, in my view, enough to earn a living from. Please let me explain before you fry my IP address.

In the past 30 odd years alone, even the unleveraged long only holder of US stocks has had many barren years (and multi year) periods when he lost or didn't make.

In my usual, inelegant fashion, what I am saying is that if you trade for a living — for yourself (i.e. at the sharp end of the game) then buy and hold alone doesn't cut it. (Unless you start in 1982 or 2009 or some other retrospectively chosen low). This does not dilute the effectiveness of the strategy, I'm just saying an individual's perspective and starting point dictate what weight one should give to the passive, low vigorish strategies.

Frankly, a low single digit return with a very poor Sharpe Ratio over the lady two decades LESS retail friction, well… I certainly couldn't have lived off that taking into account my extremely modest circumstances when I started my speculative business in 1990. Anyway — it's at all time highs now right!

Ralph Vince writes: 

Worse–you're still going to touch that money. You're going to take a morsel, or add a morsel, you can't sit there and forget about it.

Now you're on the curve.

Now, if you are 100% invested, you are completely doomed, and it isn't a matter of if.

Nov

25

Among the fascinating anecdotes in Art Shay's fascinating book Album For an Age, which I am reading with delight, is this description of the way they bought companies in Chicago in the 1970s. Nat Cummings of Consolidated and Henry Crown of General Dynamics and Hilton had a regular gin game at the Drake every Sunday evening. An entrepreneur with a major paint company, Kirsch asked Crown if he could present him with his game plan and financials with a view to a purchase. Crown said okay, meet me at The Drake, but be brief because I don't wish to interrupt the game. It would be disrespectful. Kirsch spoke for 5 or 10 minutes to Crown giving him the lowdown and the price. Crown said, "I'm afraid that the asking price is too high. Good luck to you. I'll discard the 9 of spades." Without interrupting the game Cummings said, "young man, I like what you said. I"ll buy your company. Hendry, how many points did I leave you with on that gin."

I wrote to Art: "My only regret is that I did not know you and your wife in previous years. I am an avid collector of books and letters and would have had so much to talk about with your family. And what a family it was."

Art replied: 

Likewise. Anyone who sends Bo to another continent to make business decisions should be worth meeting. It's still possible. I have 2 shows opening in Chicago–BUT have a nice show of celebrity pictures opening in NYC March 6 at the Morrison Hotel Gallery, 136 Prince Street in Soho. I'll be there. 

I'm 91, but am resolutely planning to do a new bio based on my 150 or so blogs on Chicagoist.com vault of Art Shay. I'm syndicated in 14 US cities, plus Toronto, Shanghai and London. Impetus came from a piece I did titled "Sleeping With Elizabeth Taylor and other perks of the photo trade." It got well over 50,000 hits. Look it up.

Nov

25

Most of the people who come in my store say, "Glass? I would break it within an hour."

Did their mommies slap their hands once too often? You would think that we lived in a nation of klutzes, so thoroughly have these people been indoctrinated to use plastic.

The things I sell are borosilicate glass, an exceptionally strong and practical formulation fired at extremely high temperatures. Think Pyrex, Duralex. Sadly, verbal assurances fail to convince.

Today, I tried a new tack. "Drop it," I suggested to the customer. He hesitated. I shrugged. He dropped it.

I really didn't know what would happen. I had knocked all the bottles off a display table a couple of days ago without one of them breaking, but he was holding the bottle a foot higher. When he came in, I was in the middle of planning just such an experiment for after hours, with dustpan at the ready.

He dropped it. The glass survived.

"That was very convincing," he said, and paid.

Convinced of the power of demonstration, I sold a GlassFlask to the next people who walked in by pouring boiling hot water over a tea flower and offering them a taste in a Dixie cup.

It is bitterly cold today, and some people come in just for the Kleenex on the checkout counter.

Nov

25

There is a serious game of cricket happening at the moment between England and Australia. A test match which goes for 5 days. In that 5 days fortunes are made and lost and reversed on a daily basis.

The comment section of most papers following the action gives one a good indication of herd mentality. If this is the same representation of those trading markets news and announcements, then it is little wonder most are caught off guard. A day ago it was all pro England comments and the Aussies were toast, and today it's…. "Doomed, we're all doomed, I tell you. Well played Australia. England haven't a hope in hell of saving this Test."

Nov

11

If you clicked on this email expecting to find my latest prescient thoughts on Apple, you will be disappointed.

Rather, I'm looking for some inexpensively-valued stocks in iNDIA and iNDONESIA. (I know, I know, Russia is supposedly cheap too.)

I looked at the big caps in the India ETF's and they don't look cheap for a country that is suffering from the early stages of a capital flight. And I don't trust my Bloomberg for finding diamonds in Chanakyapuri.

Does anyone have some favorites? As Sergeant Joe Friday would say, "just the tickers, Ma'am

(Don't be shy. I only harass Mr. Rogan when his stocks go down.)

Many thanks.

Sushil Kedia writes: 

Define a CIX b'berg as: CNX Nifty Index / CNX500 Index. That would be a ratio of Largest 50 stocks index and the broader 500 stocks index.

A severe flight into safety has played out. Looks like the penultimate round. Obviously the small and mid caps have had visited 10 year lows, more than half of the 4500 listed stocks trade at P/B <1 and about one fourths of the stocks are at a P/E <10.

Elections are due in the first half next year for the Union Govt. Important state elections in 5 states results on 8th Dec.

New high in large cap index got everyone's granny to orgasm. Market closed lower last 5 days.

Flight into safety brings a market to all time highs, with no breadth so to say. The severe divergence in small caps and mid caps produced a jumbo rally in them briging them to be now "overbought".

While the hoi polloi rejoices both the new high trip in the prior weeks and the sizzling rally in smaller stocks, there are heavy signs of distribution. This market is right now hollow.

Flight into safety… hmm… a final scramble of a flight away from safety, i.e. no place to hide remains due…

Well, if this time its different is an adage everyone heard all their lives, I am watching outside of India, while sitting right inside here. Will emerging market currencies sell off? Will this whole world sell off ONLY after FED actually tapers off and there would be no reward to those who will anticipate and speculate?

Cheap… without some reason? The obvious may have first become unobvious, yet once more.

Jeff Rollert writes: 

Bristol Myers gas had this strategy for years. They're basically banks now.

Nov

11

$WFM - Whole Foods posted its first material slowdown in sales post the recession - Credit Suisse

Richard Owen writes:

YE reporting is going to be a minefield of canaryism: intra-shutdown slowdown vs. Th-Th-Th-Th-Th-… That's all, folks.

Nov

11

I recently spoke with two doctor friends (an independent study with n=2) about their relationship with the government in their medical practice, specifically in Medicare. Both were quite willing to get paid a fraction of the normal cost to treat their medicare patients or not get paid at all. This they could shoulder. One recounted that late in the year, around this time, state medicare funds completely dry up and they get almost nothing in pay from medicare. What they could not abide however, was government oversight/compliance in the name of fraud prevention.

Now that all the easy targets and hucksters in FL have been rounded up, government needs to find other sources of revenue. So they go after legitimate doctors. One received a $300k fine for minor offenses in not checking certain boxes on certain forms. The other was reprimanded and fined for working pro bono on some patients and not others. Apparently he was not qualified to make a determination over who he could treat for free. The government fraud receipts have gone up from a few $100 million several years ago, to over a billion now and is a part of funding ACA. With so much focus on demand (ACA, affordable this or that), very little consideration is given to supply. Incentives for doctors are largely ignored. They predicted fewer hospitals staffed with fewer doctors. On a positive note maybe Walgreens or Rite Aid will fill in the gaps with NP's and there will be a positive certainly unintended consequence.

Nov

9

Note: This was a brilliant article by Ken. It should be read by all market people, all athletes, and all others. I'd like to retain Ken to teach my children a few things. I wish I knew and practiced all these things. vic
 

"Feet-work" for Racquetball Court Movement

Ken Woodfin

How you move on the court greatly affects how you play because ultimately when you aren't there you can't create your competitor's despair.

First, here are movement suggestions for your feet, or "feet-work", and how to build these skills. Second, we'll progress to tactical feet-work and how using certain feet-work skills will raise your game in specific match situations.

I. Feet-work Skills

• Stay Active

Keep your feet alive. And begin from the middle! Here we start with simple principles and then we cover other effective and innovative movement skills.

- Keep moving

When you close in on a ball, take small adjustment steps as you read the ball. Keep your feet light and moving so you may adapt to the bounce of the ball. Play the ball instead of allowing it to play you. Think of it as when your feet stop moving your brain may stop, too! So keep your feet alive, your mind open, and then react and stay active right up until you can just about reach out and pluck the ball out of the midair. Then set your back foot, wind up as you walk into your shot and stroke confidently.

- Go Middle

After you stroke the ball make it *your* tendency consistently to move middle. Even in a slower paced rally, like a nick lob game or ceiling ball exchange, simply *take a walk* back middle. That walk gets you in prime coverage position. When you stay on the fringes of the court, such as against the back wall, up against a sidewall, or locked in the service box after serving, you leave yourself way out of position. Take a more proactive, tactical approach and seek control of the middle. From the middle you may move where you see the ball going or you may move to allow the required straight and crosscourt shots owed your competitor. Now let's explore faster ways to move about the court and always return to the middle.

• Athletic Body Position

How tall are you? Play a little bit shorter than your full height. Why? Know that as soon as you stand up too tall, you have to drop down to move, burning up your moving time. Also, when you bend down too low, you first have to rise up a little to move most efficiently. Slightly bend at the waist. Flex your knees and ankles. That slight body coil spring-loads your whole frame to be ready to move about the court more easily and smoothly.

• Be "ambi-footress" - Start on Either Foot

Choose to avoid being, for instance, just right footed, like you may be right-handed or right eye dominant. Learn to start out equally well off either foot and you'll be able to move about the court even more efficiently and quickly. You can teach yourself to be "ambi-footress". Place your heels flat up against the back wall. Step off aggressively with one foot. Sprint off the wall for a short distance. Return. Switch to the other foot. This exercise is done for two reasons. One, by learning to take shorts sprints off the wall, you train yourself to eliminate a possible false step backwards, while you step off strongly with the lead foot to begin your sprint. That forward only move makes you faster because you don't start going forward by first going backwards. Two, by switching feet and drilling with both, you teach yourself to step out equally well with either foot as you move about the court. That duality makes you a more versatile, efficient mover and harder to back into a corner.

• How to Shuffle Step

Most players are very familiar with the shuttle step as a form of court movement. Here is a short primer: Start near back wall facing either sidewall. Drop down a little height-wise and slide step sideways away from the wall using the foot furthest from the wall. To complete a shuffle step, slide the trail foot sideways, bringing it up next to the first landing foot before you continue your sideways shuffle.

• Power Down to Stop Shuffle Step

As you reach the service line or first line, put on the brakes by bending your lead knee and then flex your trail knee to lower your body. This knee work gracefully stops your forward momentum. The braking move lowers you center of gravity. Bending your knees uses their natural shock absorption to slow down your body when moving about the court. The ability to stop puts you in better, lower position to: (1) perform a balance stroke, or; (2) "freeze" to cover as your competitor strokes, or; (3) bolt to take off in another direction. How do you *bolt* best?

• Why Use Crossover Steps?

The crossover step gobbles up ground from the get-go. To teach yourself to crossover, again do the shuffle step from the back wall toward the service line. When you approach the first line, again put on the brakes by bending the outside leg and then flex the trailing leg. The control method first: As soon as you stop, push off the lead, outside leg and step off in the opposite direction with the trailing leg, the one furthest from the line. Take off in a sprint towards the back wall and slow down well before you reach the wall. That's the SLOW way! Now let's learn the faster, crossover way.

- Crossover As You Learn

To incorporate the crossover, repeat what you did before by shuffling to the service line. This time, when you get to first line, bend that outside, lead knee, then inside, trail knee, brake, and push back as you pivot off both feet (on the pads behind the toes). Then stay extra low as you turn your hips and shoulders and crossover aggressively with the outside, trail leg. Make it a big crossover step. Drive your arms, even pumping with the one holding your racquet, as you dash your very best to the back court. This big crossover step simply makes you faster. The crossover step works for several court coverage situations, such as …

- Dash Forward

When you're stuck in the back court or right up against the back wall and you can see the competitor placing a low kill in the front court or when you see a high ball about to fly way off the back wall, use your jets to dash forward. How: First step crossover into a low, arm pumping all out sprint. Stay low and run quietly or avoid stomping. On the way decide which shot you should hit? Take off running with the ball making sure the ball is away from you. If the ball is flying off the back wall, keep it in the corner of your eye to avoid it running up your back. Use the racquet in your hand and pump both arms to run to where you think you can intersect with the ball while letting it drop extra loooooow.

- Play Keep-away vs Always Drop Shooting

Front court rundown shot tip: get up sideways to the ball and selectively use soft drop shots against a rapidly closing competitor. Be ready to snap off an angled pass toward the least covered back corner. Only when the competitor checks up and backs off to camp on your pass should you hit a soft, disguised dropper.

• Just Jump

An advanced form of the shuffle step is a flick of the feet into a small leap or jump. The jump is used to begin your move or jump to a stop. The player jumps back, sideways or forwards off both feet at the same time. The jump is used to instantaneously adjust your positioning to: (1) clear for your competitor; (2) approach the ball, or; (3) start your run. The landing of the jump is ideally soft and springy, ready for more movement. Still lots of little adjustment steps remain to get in the best position to cover or to flow into a ball that's still reacting to walls or spin. Both an analogy and a metaphor may help explain the ease of the jump and the importance of still moving after landing.

- Leap to Start Analogy

Watch basketball players standing along the free throw lane. After a made fee throw the players do a little rising up leap to get their engine running before they head down court to switch ends. That leap on court can be a little more plyometric or a rapid leap to move over some distance. Learn to emulate a b-ball player by getting yourself in motion.

-
Mighty Mouse Swoosh Metaphor

Oftentimes players land like Mighty Mouse just even with the ball as if to say, "Here I am to save the day!" But really Might Mouse has lots more still to do. Landing a little behind contact allows for momentum to be built up in the post landings stroke. Coiling back and then stepping into the ball or at least moving forward into the ball is best done with little adjustment steps, then weight back and through, and timed body prep and uncoil.

• Split Step Potential

A technique well known in tennis is the split step. In serve and volley tennis, as the server approaches the net, at the "t" formed by the center line and the back line of both service boxes, the net rusher spreads his feet to a two-footed, paused landing type hop versus coming to complete stop. He reads the situation and then takes off toward the angle where he sees or *expects* the ball to be. The same principle of using a split-step may be applied to racquetball, too.

[Continued]

Nov

9

- Split-Step Tactical Cover

After stroking a deep pass or ceiling ball, dash forward to the dashed line. Step on the line with one foot, and spread your feet to a balanced, on your toes, split-step ready position. Partially face the competitor and read his shot. Get ready to take off toward any one of the 4 quadrants (4 corners). Adjust. If your competitor must retreat to a back corner, you may split-step again to angle off and partially face the competitor.

- Block the Reverse

Move and split-step ON the imaginary diagonal line between the ball in deep court and the opposite front corner. On the diagonal you have a good view of the competitor, while you face the front corner on that side of the court. You get to legally block the reverse by the competitor when you get there before he can set up to shoot. On the diagonal you're ready to cover first the down the line, then the front court, then the crosscourt, and always a ball back through the middle. If instead you were to just face the front wall, widest DTL balls may be just tantalizingly out of your reach.

• Crisscross, a Football and Basketball Feet-work Staple

When you move sideways along the sidewall and you can see the shuffle step is just not gonna cut it and you need to get further, faster, the crossover step with the trail foot BEHIND your lead foot, the "crisscross" gets you there on balance, quickly. As you crisscross, the foot that's being crisscrossed acts as the post. That post foot is your temporary balance point supporting you until the other shoe lands. The crisscrossing foot lands just past the posting foot. Then the posting foot flashes ahead to complete the crisscross. Crisscrossing is sort of a skipping maneuver behind your back. The object of moving about the court is to go as efficiently as possible. The crisscross allows you more options when you need to move sideways lickity-split. As an example, many top flight players serve and then crisscross with their lead or plant foot behind their trail or back foot as they retreat out of the box. It's all about the way to most quickly move and clear the box to cover the receiver's options by being a “littler” further back. A crisscross is much faster than the shuffle step out of the box. A full crossover step commits you more toward the side where you crossover leaving you more vulnerable to the crosscourt return angle. So the crisscross-over is often the crossover of choice to escape the box. The crisscross is an example of a transition to tactical feet-work. Now let's look at more tactical feet-work examples.

II. Tactical Feet-work

• Banana In Approach

Ideally stroke the ball from a light, springy, slightly closed stance, with your front, plant foot half a sneaker closer to the sidewall than the back, push off foot. The partially closed stance allows you to turn your body into a forehand or backhand. How do you get into that ideal stance off BOTH wings? Once you've moved behind and to the side of the ball so that it's about an arm's distance away, you're ready to take on the *banana in approach*. Set the big end of your imaginary banana as the back of your stance. It'll be the push off leg. Then step in with a curved stride with your plant, front foot. This is the "banana in approach", stem in. Stem in means your weight pulls "in" toward the stem or in toward your body. This flow of force and body weight in toward your center gets your legs involved. Force then works up through your hips, turning your torso and finally catapulting your upper body as it synergistically connects to your lower body for greater summed forces.

• Jab and Cross

When the serve is not rocketed into a corner, use the time to jab step with the foot closer to the ball. Then crossover with the trail foot to both close your stance and apply better force and weight into your return. The crossover offers the best balance, while ideally allowing you the receiver to take the ball out in front or ahead of your stroking shoulder.

• Crossover Lunge For Photon Serves

When you pick up a super-fast "photon" serve as it rebounds off the front wall or worse case, as it rockets by the server, crossover with the far leg and lunge low. Be purely focused and doggedly determined to get the ball back to the front wall. Know that you may make contact BEFORE your lunging leg lands, but fear not; you WILL land! The crossover step also serves to coil your shoulders and your racquet naturally flares back with them. Use that natural prep and look to go down the line with your ROS or even DTL to the ceiling to push the competitor sideways and back. Know the main object is to get the ball back to the front wall. The secondary objective is to get the competitor out of the middle. Even a crosscourt pass or ceiling may work because the server will many times be moving your way pursuing the flight of his serve and blanketing the line which is the most dangerous return. Often making good string contact will be enough because you may use the server's power against him to bunt the ball away from him before he may react.

• 2-step Serve Footwork

Paint the edges of the very back line of the box with your sneakers. The foot that will be the plant, lead foot in serving stance starts ahead of the other. The feet are slightly apart and you're in a slight crouch or balanced bend while not squatting down. The racquet is out in front of you in a threatening position. The ball in your offhand resting against, let's say the grip of the racquet. Step up with the back foot toward the front foot. Land inside the front foot and just behind it with both sets of toes pointed at the sidewall.

*Rec: as you step up, draw your racquet back and use and your other arm like a tightrope walker holding his balancing bar.

- Immediately crossover with the front foot toward the front of the box, even landing with the arch of your foot on the front line. Then work your plant leg against your push leg to power your drive serve.

• Get Out of the Box

AFTER you serve and complete your full follow-through your next step is to get out of the box. When you stay in the box you make yourself vulnerable to the pass you can't reach or the ceiling you can't short-hop. Sure you're closer to the attempted kill, but "he", the receiver *sees* you and his pass may rocket by you. So clearing the box, even by just a step, improves your chances considerably.

- How to Get Out of the Box

The way to get out of the box is to first regain your balance. Most of your weight is ideally on your front foot after you serve or stroke. So backshift your weight from your front to your back foot. Take a crossover step with your front foot toward the middle and partially spin toward the ball to flow out of ”no mans' land" in the service zone. Only body spin enough to get a view of the receiver over your shoulder. For protection use your racquet head to look through your strings as you cover your head.

- Retreat with a Crossover or Crisscross

The crossover step is the fastest way to retreat out of the service box. The crossover step may be in front of your back foot or it may be a crisscross-over behind your back foot, which will be covered later. The main point is to avoid a stretch back step with your back, trail foot. A step with your back foot spreads you out, slows you down, exposes you to a loss of balance and an inability to quickly reverse your field should you need to dash back into the front court for a possible low return. Pivot on your back foot and crossover. After the first “crossover” step do another crossover to cover ground even faster. You may shuffle, side-to-side to flow back for serves you read the receiver will return way back in deep court. However, compared to the crossover, the shuffle is in slow motion, as you retreat out of the service box.

- Practice Getting Out of the Box

As part of practicing your serves, practice the crossover (or crisscross-over) step to get into center court. The ultimate objective is to straddle the dashed line with both feet. At a minimum, make your goal to touch the dashed line with your back foot. ALWAYS BLOCK REVERSE pinch angle. From there you can cover most all ROS's. Finish by angling off and face the sidewall in the front court and be ready to blanket the line, your primary and most vulnerable cover.

[continued]

Nov

4

Prof. Charles Calomiris of Columbia Business School will speak at the Junto this Thursday evening about his forthcoming book, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, co-authored with Stanford Political Science Prof. Stephen Haber.

"Systemic bank insolvency crises like the U.S. subprime debacle of 20007-09…do not happen without warning, like earthquakes or mountain lion attacks. Rather, they occur when banking systems are made vulnerable by construction, as the result of political choices."

–Fragile by Design

Time: 7:30 p.m. - 10:00 p.m.

Date: Thursday, November 7th

Place: 20 West 44th St., ground floor

Format is highly interactive, with plenty of opportunity to engage the speaker. Hope you can make it.

P.S. I paste in below Calomiris' review of The Bankers' New Clothes, which appeared in Barrons.online this week.

The Bankers' New Clothes: What's Wrong with Banking and What to Do about It, by Anat Admati and Martin Hellwig

Reviewed by Charles Calomiris

"Capitalism without failure is like religion without sin," as economist Allan Meltzer once wrote, a stricture that applies with special force to the capitalist activity of banking. When banks that cannot pay their bills are protected from that failure by government, the banking system not only allocates funds inefficiently, it may recklessly pursue risks that bring down the economy.

The financial crisis of 2007-09 wasn't the first to demonstrate that government-protected banking systems tend to blow up. Over the past three decades, there have been over 100 major banking crises worldwide in which government protection often encouraged excessive risk-taking. Given these concerns, authors Anat Admati, a finance professor at Stanford University, and Martin Hellwig, a director at the Max Planck Institute for Research on Collective Goods, deserve much of the praise they have received for *The Banker's New Clothes*. By raising public awareness about the dangers of taxpayer bailouts of "too big to fail" banks, they have contributed to the growing support for stronger, prudential regulation of the banking system, especially in Europe and the U.S.

The two main cures the authors propose are another matter. They would force banks to maintain much more of their financing in the form of equity rather than debt, so that bank stockholders rather than taxpayers bear the downside risk of bank losses; and they would break up global banks into much smaller entities. Both proposals, if implemented as specifically set forth in this book, would be quite costly in social terms and unlikely to avert future bank crises.

Admati and Hellwig assume that increasing bank equity is a matter of boosting the minimum requirement for the book value of equity relative to assets, which includes loans. Were it only that simple, but it is not; increasing the equity ratio based on book value does not necessarily increase the true bank equity ratio. Also, any simple equity-to-assets requirement could encourage banks to pursue hidden increases in asset risk. Empirical studies of bank failure typically find no relationship between the book equity ratios of banks and their danger of insolvency. This does not mean that raising equity ratios is a bad idea—just that requiring increased book equity by itself does not result in higher true equity, much less in higher equity relative to risk, which is the essential goal of regulatory reform.

Taking their book's title from Hans Christian Anderson's fairy tale, the authors completely dismiss the idea that higher equity requirements might entail costs as a "bugbear" that is "as insubstantial as the emperor's
*new*clothes in Andersen's tale." In their view, "For society there are in fact significant benefits and essentially no costs from much higher equity requirements."

This view has been proved false by decades of research. The potentially high cost to society from requiring high equity-to-asset ratios is a reduction in banks' willingness to lend. When a bank is forced, either by sudden equity losses or by increased regulatory requirements, to raise its ratio of equity to assets, it typically decides to reduce lending rather than to raise equity to maintain its existing amount of loans.

Not that recognizing the costs and complexities of boosting ratios means we must abandon the idea altogether. Raising equity is costly but worth it, because the benefits of a stable banking system exceed the costs of reduced loan supply that would result. Accordingly, I would raise required equity to roughly 10% of assets, about twice today's level.

But we must also ensure through additional reforms that banks maintain that ratio in actual equity, not just book equity, and that they do not offset that increase in equity with a big increase in risk. Higher equity will work as a reform only if it occurs alongside other changes in regulation to ensure that banks maintain adequate equity relative to risk. All this is a far cry from the authors' call for a simple hike in required equity ratios, based on book value, to about 25% of assets, without accompanying reforms.

What about breaking up big banks? The studies on which Admati and Hellwig base their conclusion that there are no social advantages to large-scale, global, universal banking are simply not useful for judging the scale advantages of global universal banks. The data used in those studies come mainly from banks with very narrow ranges of products, services, and locations. Citing those studies to gauge the efficiency of global universal banks amounts to an apples-and-oranges confusion between two very different types of banking enterprises: small traditional banks and global universal banks. One cannot be a global universal bank, with multiple product lines and locations in scores of countries, with an asset base of under $100 billion. Such banks provide important and unique services to the global economy, which Admati and Hellwig are wrong to dismiss.

Despite these criticisms, The Bankers' New Clothes is an important book that identifies correctly the central problem of government protection of banks. But regulators should not single-mindedly focus on very high book equity requirements or on breaking up global banks. When those prescriptions prove to be costly and inadequate for the challenging problem of reducing bank instability, policy makers might find themselves as naked as the emperor in Anderson's story.

Nov

4

I have a hypothesis that older people with money to invest put too much value on youth in their investments, i.e, that they think that young people and things that young people buy are better than other things. I wonder if this is because of their desire for immortality or just a rejection of their loss of virility. I looked for articles that were relevant to this hypothesis but not having the scope or sweep of Pitt, or Mr. E, I have not yet struck pay dirt.

Vince Fulco writes: 

Add to the mix of hypotheses, worry about not keeping up or relevant on world developments, IT, or scientific advancements. It is exhausting for some generations given they were raised with sliderules.

Scott Brooks writes: 

Isn't it fair to say that the growth companies of yesterday are the value companies of today?

Older people probably want, at least, some growth in the portfolio, so they invest some of their money with the younger generation who generally more innovative and/or more attuned to "newest" innovations and idea's that come out.

This makes me think of the thread that we had on the open list last week about music. The older we get, the less we are attuned to modern (innovative?) music. We become entrenched in what we know and what impacted our lives growing up.

My theory is that the growth stage of our lives occurs during our teens, 20's and 30's. In our 40's we begin to transition into entrenched value stages and by our 50's (and one), we are value driven.

I think this applies to music and investing.

However, if we are smart (and I'd like to think we are…..at least some of the time), we inherently understand that "youth innovates and invents" and we want to be a part of that.

And since by the time we are in our 40's (and up) we have the money, we are the ones that the "youthful innovators and inventors" come to for cash to fund their ventures. And if we missed the Angel/VC and even IPO stage, we'll still invest a portion of our portfolio's with them to harness their vision……and recapture some of our own lost youthful vigor and insight.

Kim Zussman adds: 

Perhaps this wasn't the case before Microsoft (Apple, Google, Facebook, etc) showed that young computer mavens could hit it big, and that nerds will rule the world. People who came of age in the PC era.

Weren't the big success stories pre-1980's stodgier companies?

Scott Brooks writes: 

Wouldn't it be fair to say that GM, Ford, IBM, were the growth and innovative companies of the Henry Ford and Bob Hope Generations?

IMHO, every generation has their MSFT or AAPL, or GOOG……it's just that by the time we know about them (we being the next generation), they've become value companies.

The car companies and airline companies of our parents generation were the equivalent to the computer companies of our generation.

Pitt T. Maner III adds: 

One would think that the influence of youth is increasing due to the higher use of the internet by the over 50 crowd (which includes me).

1. "Baby Boomers Driving Technology Wave":

'What explains the rapid pick-up of tech tools among the older crowd? "The younger investor is usually an influencer towards their parents in terms of technology," says Ryan by email.

The numbers dovetail findings by the Pew Research Center's Internet & American Life Project that more than half of adults 65 and older are online today. They're flocking to YouTube, social networks and shopping sites—while also growing more comfortable using banking and other financial services online. They form a surprisingly active demographic for Facebook, where 57% of those 50 to 64 are on the social network, according to Pew.'

So you might look at who are the main internet influencers with respect to individual stocks and the stock market and older internet users. For instance Cramer appears to have a fair amount of online "clout" with respect to stock selection as might several others on CNBC.

2. There are many companies trying to figure out and somewhat quantify who the influencers are– such as Klout.

3. This is a recent paper on the influence of the collective mood state on Twitter with respect to the market.

Behavioral economics tells us that emotions can profoundly affect individual behavior and decision-making. Does this also apply to societies at large, i.e., can societies experience mood states that affect their collective decision making? By extension is the public mood correlated or even predictive of economic indicators? Here we investigate whether measurements of collective mood states derived from large-scale Twitter feeds are correlated to the value of the Dow Jones Industrial Average (DJIA) over time. We analyze the text content of daily Twitter feeds by two mood tracking tools, namely OpinionFinder that measures positive vs. negative mood and Google-Profile of Mood States (GPOMS) that measures mood in terms of 6 dimensions (Calm, Alert, Sure, Vital, Kind, and Happy). We cross-validate the resulting mood time series by comparing their ability to detect the public's response to the presidential election and Thanksgiving day in 2008. A Granger causality analysis and a Self-Organizing Fuzzy Neural Network are then used to investigate the hypothesis that public mood states, as measured by the OpinionFinder and GPOMS mood time series, are predictive of changes in DJIA closing values. Our results indicate that the accuracy of DJIA predictions can be significantly improved by the inclusion of specific public mood dimensions but not others. We find an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the DJIA and a reduction of the Mean Average Percentage Error by more than 6%.

4. That reminds me of these websites

tickertweets

Marketpsych

avoiding the herd

5. This influence effect on the older investor might have to be considered with respect to the depressing findings asserted by this research:

"Examining the economic costs of aging, we find that older investors earn about 3-5% lower annual return on a risk-adjusted basis. Collectively, our evidence indicates that older investors' portfolio choices reflect greater knowledge about investing but their investment skill deteriorates with age due to the adverse effects of cognitive aging."

David Lillienfeld writes: 

And the problem is that it's unclear that there's any company to take over the place of MSFT, AAPL or GOOG besides AMZN, which can't seem to earn any money (real profit, not just revenues). I had hoped that my now, there would be some suggestion of which companies those may be, but I'm not seeing them.

Scott Brooks writes: 

You could have said almost the same thing about railroads…..then came big steel.

You could have said almost the same thing about big steel….and then came GM.

You could have said almost the same thing about GM…..and then came IBM.

You could have said almost the same thing about IBM…..and then came MSFT.

You could have said almost the same thing about MSFT…..and then came GOOG.

You could have said almost about GOOG…..and then came……?

You have successful well run companies that create cash flow and then use that cash flow and credit to buy up smaller (other) companies….and become dominate.

Isn't that just the way the eternal business cycle works?

Isn't that really just the way of mankind and government?

Nov

4

I knew many Silicon Valley entrepreneurs on the spec list and in business in the late 1990s. To a man, they all refused to invest in other Silicon Valley companies claiming that they knew everyone in the industry, and they were all phonies, and finaglers, not to be trusted. The kind that hyped their stock, sold out and repeated in some other field with the glow of unjustified success on their backs.

I have met many who fit this description since. However, I did not generalize the situation to Canada, but apparently I should have as the iconic Canadian company's insider trading of the last several years, and announcements before sales shortfalls (they were big on "shipments" rather than sales shows. The big product presentations as Disney should have been a signal.

Oct

30

I'm a bit concerned about the last Apple quarter report—not because of what's going on right now but because the thing that i was hoping to hear was that the company wasn't concerned about margins so much as market share. That was the mistake of the 1980s—Apple focused on keeping margins up. Scully thinks that that was a mistake though not as much as firing Jobs. I think he has it backwards. Amazon is worth a fortune without having worried much about earnings. Apple would be the same—if it focused on market share first.

On the innovation front, Apple has always been about changing the relationship between man and his environment. That's what the iPod was, that's what the iPhone was, that's what the iWatch will be about, ditto for the iTV. What are the next two things in Apple's quiver? Try these two:

1. Apple purchases Nest, creates an iTune interface for all manner of modules to control a house. For instance, it reaches an agreement with Whirlpool to put those modules into Whirlpool's products. The modules cost all of $20-30, but they allow you to control everything in your house remotely. Everything.

2. Apple reaches an agreement with Ford to put an Apple iCar into each Ford auto. The iCar contains a description of what properties you want the car to be optimized for. Speed? Mileage? Handling soft ride? Handling firm ride? and so on. You could even build into the iCar a module, software programmable by an insurance company to monitor driving habits, a la Progressive. You could change the iCar with an iTunes like interface, and each driver in the family could have their own iCar. Junior wants the car? Dad puts the iCar into the car—using a secured compartment that Junior wouldn't have access to. Why? Because Dad's put a special limit on the iCar to keep Junior from going more than 70 for more than 15 seconds every 15 minutes. (Junior may need that momentary spurt to escape an accident.)

Ford would like the device because it could segment the market with it—the more expensive the car, the more capabilities in the iCar, and the iCars could be separated on the basis of the attached device, much as differentiates the iPhone 5 from the 4S.

There's lots Apple could do with such a device.

Strange that I have't heard anything about it—and that would sell quickly. You could even upgrade the iCars with each model year. Apple would have secured built in obsolescence. Upgrading the motor? Upgrade your iCar. Etc.

Now, if I can think of that, why hasn't Apple?

Jeff Watson comments: 

If you don't like what's going on, you can always short the stock.

Ed Stewart comments: 

Tying the aspirational Apple brand to something so lame as a mainstream car company seems like a terrible idea to me.

As for Nest, I think about my smoke alarm or other appliances in the home only once every 3 years or so, if that. It is a non-issue that does not solve any significant need. I can handle my smoke alarm without notes from my iphone. Why apple would want to tie in with such things once again seems a non-starter to me, degrading to the brand's appeal. If anything such features could be done through an app of little significance, a side feature among tens of thousands for those who want it, developed by a third party.

I could be dead wrong, of course. One person's strategic brilliance appears banal and foolish to another.

Good thing we can trade and sort things out.

Carder Dimitroff writes: 

I'm not an expert on Apple. I have no idea what they may be developing. However, I do think David may be offering an interesting idea.

Somebody will offer a simple home management system to manage energy consumption. It would take someone like Apple or Google to figure out a simple, easy to use system. It also could come out of somebody's garage.

Pressure is building for consumers to gain control of their energy consumption. Despite low wholesale prices, retail energy prices continue to increase. Regulators are promoting demand side management policies. Intermediaries are happily removing themselves between the consumer and the [volatile] power markets. Smart meters are being deployed across the nation to help consumers become responsive to market conditions.

The setup is nearly complete. A new day is arriving. Consumers will become fully exposed to the dynamics of the deregulated power markets, which operate 24/7 and change every three to five minutes.

The utility will always own the meter and outside wires. The consumer will own everything behind the meter. Creative developers will begin focusing behind the meter and help consumers manage their purchases of electric, natural gas and water.

Residential and commercial consumers will need programmable sensing and control devices. I have no idea what the technology will look like. However, it needs to be simple, buried and invisible to slow adoption consumers (like automobile computers). It also must manage energy consumption without altering lifestyles.

This is more than managing a thermostat. It is about controlling everything on the consumer side of the meter.

Apple and Google are very aware of energy issues. They are aggressively investing in large-scale alternative energy production facilities (solar, wind, fuel cells). Google invested in high voltage transmission lines.

Combining their energy knowledge with their consumer electronics experience suggests they are in a unique position to offer innovative demand-side management technologies. This would include the opportunity to manage massive amounts of data (Oracle is already trying to claim this space). If Apple or Google takes this path is another question.

Apple and Google have already demonstrated that change usually comes from the outside. One fact we know, consumers cannot expect their plain old utilities to develop innovative technologies. The question for me is whether Apple or Google can still deliver an out-of-the-ballpark product.

Oct

22

I thought this article might be interesting to those of the Randian mindset looking for love. From the Wall Street Journal:

"Finding Love With a Farmer, a Gluten-Free Eater or Ayn Rand Fan"

James Hancock wanted to meet a woman who shared his core values. But when you're a strict Objectivist, it can be a little tricky.

Jason and Morgan Kontz, with baby Elliette, met on the dating site Farmers Only.

Mr. Hancock is a proponent of Russian-American author Ayn Rand's philosophy of capitalism and self-interest. At age 30, he had already been "looking for a very specific kind of woman" for three years when Google searches led him to the Atlasphere, an Ayn Rand appreciation site with a dating component.

There, he found his dream date: a woman who also wanted to do logical cost-benefit analyses of every decision.

A growing number of niche dating sites have popped up to serve people who think they know exactly the type of person they want. These includes Farmers Only, whose 100,000 users may have been attracted to the site's tagline, "City folks just don't get it." More recently, GlutenFree Singles launched for love-seeking wheat-free folks.

Atlasphere founder Joshua Zader, 40, of Phoenix, says niche sites are more efficient than broader sites such as OKCupid or Match.com.

"If you assume that maybe 1 out of 500 people is a serious fan of Ayn Rand's novels, on a normal dating site you have a 1 in 500 chance of someone sharing the same basic values," he says. "On the Atlasphere, every profile shows you what you want," he says. The 10-year-old site has seen a spike in membership in recent years—it has more than 16,000 dating profiles—after two "Atlas Shrugged" movies were released, says Mr. Zader, a Web developer. User handles include "Atlas in Arlington" and "ObjectivelyHot." 

Oct

21

It begins with a new uncertainty, we're going to attack Syria, we're going to default on our debt, a Middle East fight, in conjunction a 1 1/2 % decline or more in stocks or bonds then fighting between the conservatives and the liberals a call by Buffett and Krugman for government intervention and more service revenues. A resolution with a big stock market rise to new 20 day highs an end with blame being put on those who wish lower service revenues and reduced intervention and unanimous agreement that we should never strive for reduced intervention again, and tea party types must go back to caves. How would you improve this or possibly profit from it?

Anatoly Veltman writes: 

But of course crisis starts on the way up. It's been said that no market has ever topped because someone sold massively short at the high. Any decline from the high is merely profit taking, not new shorting. So the beginning of crisis is such overvaluation that's liable to cause aggressive profit taking.

Gary Rogan writes: 

The way to predict the quick resolution of the next crisis is to figure out who is in control of the mechanics. While there was some ambiguity in this one, John Boehner played a truly masterful role in its handling and supposedly (although not by all accounts) received a standing ovation and no blame in the end by most of his tea party opponents, a deliberately induced case of the Stockholm syndrome. Next time he initiates a crisis (and there will be two opportunities early in the new year) bet on a timely resolution, and this time probably a couple of days before the deadline, as in this last one he was almost by his own admission compelled to give his tea party "friends"/antagonists as much rope as was needed to supposedly hang themselves and this will likely not be the case in the future.

Kim Zussman writes: 

Doesn't seem that ambiguous.

When the Organizer and his operatives said to worry the market worried. When the conscientious objectors gave up it went up.

We were re-elected and you will go quietly.

Oct

18

Out here in SoCal land, specifically San Diego, life has been good. 70 degrees every day, no rain, usually no clouds, etc. But all is not as it appears: the housing market is weakening.

For those not aware, in San Diego, the military is a major employer. By some estimates, directly or indirectly, between 20 and 30 percent of the economy of San Diego is based on federal spending. The home base for the USN Pacific Fleet is in San Diego. Also Miramar (think Top Gun), Camp Pendleton, among others (and there are others).

While the softness in the housing market out here isn't solely due to the sequester, even local economists of the conservative persuasion acknowledge that the sequester is having an impact locally. The assertions from some that the effects of the sequester are minor do not seem to ring true, at least not out here. I expect that while there are housing markets that will be less affected by the sequester than San Diego's, there will be an affect.

Staying away for the moment from housing-related stocks seems a prudent course of action.

a commenter adds: 

Second best city in the world behind Sydney.

Oct

17

Those who follow the biotech world may have seen that Regeneron reported some fantastic results on its lipid-lowering drug. Much more efficacy than statins. Safety data was not reported but it seems safe to say that suggestions of hepatotoxicity that first appeared with the early statins and seem to be a fixture in use of statins for the first 6 months is a segment of the population, were not present; FDA wouldn't have hesitated to intervene if there had been such suggestion, since in FDA's eyes there are already "safe" lipid-lowering drugs on the market.

The same is true for rhabdomyolysis–essentially break down of muscle (some thing the muscle soreness often associated with statin use may be a pre-rhabdomyolysis state, but the data are anything but clear on that). It was rhabdomyolysis that was the reason Bayer's Baychol was withdrawn from the market.

There are some caveats:

1. There has long been the observation that if cholesterol levels are brought below 90-100, there is little gain in mortality (some studies suggest there may even be an increase) and that cancer risk in particular goes up. Of course, recovering from a heart attack has a higher probability than doing so from cancer. Unfortunately, I can't tell you which sites–I just don't remember.

2. There are some established drugs in the lipid-lowering space. Lipitor and Crestor come to mind. The former is generic, and it is probably finally making it onto many P&T committee lists. The latter is still patent protected and, not surprisingly, costs a bit more than the former. That's not to say that Crestor is more efficacious than Lipitor. In a given patient, one may prove to be less efficacious or better tolerated than the other. YMMV.

3. The thing that made the statin market what it is today was a series of studies by Bristol-Myers Squibb and Merck showing that use of statins was associated with lower mortality–quite a bit in fact. Since the effect of Pravachol from BMS in mortality reduction was greater than might be expected if only lipid-lowering were the explanation, there has been a persistent question over what exactly it is that statins are doing besides lowering lipids. There are suggestions that they reduce chronic inflammation (considered part of the pathophysiological process underlying atherosclerosis), reduce risk of osteoporosis (very controversial), reduce risk of gingivitis and periodontitis (Dr. Zussman is better positioned to opine on that one than I am), and some suggestions of reduced risk of Alzheimer's disease, among others. Will Regeneron's drug do any of these? We don't know. Will it even lower mortality? Again, we don't know. Such studies take some time to complete, and I'm not sure if they've even been started. There's also the comparative effectiveness matter. How much this drug will cost for each QALY (quality-adjusted life years) gained isn't yet know, and whether the drug is seen to be as good a value as the statins were when they first came to market isn't known. However, make no mistake, all of these factors will enter into the calculus of how successful, if at all, Regeneron's drug might be.

4. As one who has taken Lipitor for 13 years (horrible family history of heart disease–I keep my total cholesterol below a 100 and LDL below 75), I'm not particularly interested in switching drugs, never mind drug classes. There are many patients taking statins who, I think it's probable, think likewise. That most statins are now well off patent (and cheap generics) is another reason to stay with something of known efficacy in a particular patient. That presents a problem for Regeneron: How to convince physicians to put new patients on its drug and to convert those on statins to switch. The former may be straightforward, though the issue will be one of how much more growth can there/will there be in the lipid-lowering market. I'm agnostic-to-skeptical that there's a whole group of patients needing another lipid-lowering drug. That's not to say there aren't some, though. On the other hand, obtaining health insurance coverage may be problematic, as I'm sure that Regeneron will price the drug in the "near and dear" category (to use industry parlance), meaning high. Very high. I doubt that Regeneron will follow the Pfizer strategy of pricing the drug 10% below the leading statins (or in this case, perhaps, Crestor) for two years to gain some traction in the market, but I could be wrong. One thing to consider is that biotechs are not used to pricing competitively. Usually, they are the long entity in a market space, and they will price accordingly. As for switching patients off of statins, I guess if there are those not getting enough of a reduction, perhaps with LDLs over 140-150, there's a chance of a switch being made. There aren't that many of such people, though. All of this means that Regeneron will have some work cut out on the marketing end to get newly diagnosed hyperlipidemics onto its drug, as well as getting insurance reimbursement.

The long and short of it is the Regeneron's drug may be a game-changer in heart disease–but we just don't know enough as yet about it. The data released yesterday seem compelling, yet they are only in terms of reduction in lipid levels. Fine, except we know from the statins that something may be needed to get much benefit from a lipid-lowering drug.

For those of you liking growth stocks or story stocks, this is a company with a nice story to follow, perhaps to take a position in. For value investors (read: Mr. Melvin), enjoy using the drug (if it gets to market) but don't even thing about looking at this stock. It won't be a "value" one for a decade or two at least.

The President of the Old Speculator's Club writes: 

I wonder if any studies have been done on the increased cancer risk. A little while ago, a scientist did a study and claimed that a cancer cure could save something like $5 trillion a year. However, tagged on to the end of the study was a one sentence disclaimer to the effect that the suggested savings did not take into account that while a cancer cure could well cut down on costs, survivors might find that their longer life brought on equally (or more) expensive disabilities - like diabetes or, more likely various dementias. I've been in two post-operative cardiac exercise programs - both for several years. In that time, quite a few individuals come through - most stay for the minimum period; others, like myself continue on. One thing we long-timers watched for was the continued health of those who stayed and, if possible, those who left. The nurses at one hospital were especially diligent in keeping in touch with members of both groups. Over the years (18 to be exact), as one would expect, there have been numerous deaths. However, very, very few were due to cardiac problems - more often, cancer was the cause. So, here's the question: is the propensity for cancer among cardiac survivors an inevitable result of their survival, or can (and should) their deaths be attributed to statins. I know the latter is a popular one, but hell's bells, lawyers couldn't make a dime if it proved out that longevity was the real cause.

Kim Zussman writes: 

Life should be more expensive than death because it is more valuable, especially to survivors. The problem is that the disease lottery is zero sum: you will die of something. As medical / nutrition science advances, death rate due to some diseases has plummeted - and survivors go on to die of something else.
Hand (and voter) wringers over increasing medical expenses should start by blaming antibiotics:

"Historical Diseases Death Rates" (see first table)

The progress made with infectious and cardiovascular disease has been faster than cancer treatment (and cheaper). So don't smoke, eat fish, hit the gym, wash your hands, and prepare for the final fight with unregulated cell division.

Oct

16

The threat is worse than the execution. Stocks going up on threat that the senate will pass a bill to avert shutdown. Okay, it will be announced. Then the threat will be that the house won't pass it. So it will go down. Then probably it will go down to wire in house. And perhaps the first time they vote they won't pass it, but then a change will be made to avert catastrophe, and then the market will be ready to go down again. Just a prediction in general based on board logic. 

Oct

15

From Anatoly Veltman:

I just saw this Weekly SP chart, and it's honestly… Ugly (link).

I can't imagine how we're supposed to be Bullish on such chart. Mock me all you want, I am no buyer here, sorry. I'll probably miss another tremendous growth opportunity.

Victor Niederhoffer comments:

Needless to say my silence about the chart interpretations should not be taken as acceptance. And aside from the ecology of markets, deception, avoidance of fear, relation to music and barbeque and sport, longevity, board games, etc, the whole genesis of this site from its founder was to avoid such mumbo jumbo.

Gary Phillips writes a poem: 

beware of greeks bearing gifts
and single data points
they support a myopic view
and play into the hands of the deceivers

at any given point in time
an equally compelling case
can be forged in either direction
depending on one's bias

the thing about charts
is that they fail to let one see
the markets for what they are,
but instead, for what they appear to be

Kim Zussman writes: 

Charts! Charts!
Like musical Tarts
The more you looks
The more it smarts

So look away
From Siren curves
Or you will get
What you deserves

anonymous writes: 

I refer everyone to Bruce Kovner's quote regarding the utility of charts below. If you have a better track record than he does, then you are entitled to mock his wisdom. I will gladly wager that no one who is reading this comes anywhere close to his long-term, continuous, audited track record.

There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he's not going to take a patient's temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is – whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge. Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates anew chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.

Gary Phillips writes: 

Indeed, I look at 22 charts on 4 screens myself. But, what I should have said while in my rush for cynicism, is no one single chart stands out and provides me with a competitive advantage or a forward-looking view of the market; at least not in the time honored edwards and magee kind-of-way. But when charts are related to a broader network of market events, themes, and correlated markets, etc., and provide (to borrow from the chairman) a consilience, then one can assess the departures from value that govern trading opportunities. which is what, I may say, you do so well.

Victor Niederhoffer adds: 

Please forgive my not using the term "armchair speculatons" or "furshlugginer" with reference to all those untested hypotheses and impressionist descriptives but not predictive things about chart movements and also ideas about secular bearish markets when we are within 1% of all time high, and a Dimson 1 buck in 1899 would have risen to 60,000 at present.

Scott Brooks writes: 

I say this respectfully. Vic and I have jousted on this front several times (and I believe the back forth has always been good natured). But my overarching point on secular bear/bull markets is valid to the average investor.

The extreme highs and lows we've experienced since 2000 is all well and good for the speculator who can take advantage of the market ups and downs.

But to the average 401k investor, 2000 - 2013 has been the lost decade (plus 3+ years).

Yeah, they've continued making deposits and benefited from DCA'ing. But for far too many of working class Joe's, there is very little gain outside of deposits.

The trader can benefit from the market movements. Johnny Lunchbucket has no idea what to do except to move his money around chasing last years returns, and after a few years of that, he is just flat out frustrated. Johnny Lunch Bucket and Working Class Joe do not care that the market is near all time highs. What they intuitively know (maybe even only on a subconscious level) is that even though the market is near all time highs, they've lost something far more important–13+ years of time for that their money should have been, but wasn't, compounding.

I'm not trying to be contentious with the Chair….I'm just trying to present a different POV that many on this list never experience….the plight of the average investor.

Gary Rogan comments: 

Scott, the average investor is handicapped by having the urge to sell low. If you sold during the 2008/2009 lows and waited to get in you are certainly left with a very negative impression of the market that feels like a bear market. The only feasible way for an average investor to think about the market is to look at their 45 or so year workspan as the period to evaluate market performance. 13+ years should mean nothing in that frame of reference. Now, if you start investing when you are 55, it means a lot, but you are doing the wrong thing so getting the wrong impression comes with that.

It is true, in my opinion, that the market today is expensive by such measures as total capitalization to GDP ratios. This is somewhat likely to limit returns in the next 15 years although it means very little for the next say 7 years, but within any 45 year period starting from 45 years ago to 45 years into the future market returns are likely to remain close to their historical average (barring a major calamity). The average investor who knows next to nothing should learn this very simple behavior: put a certain percentage of your income into stocks every year, and stop complaining.

Scott Brooks responds: 

The best thing that the middle class working man who who is NOT eligible to invest with top tier money managers (due to accredited investor rules) and is stuck with 15 expensive mutual funds in his 401k or his cousins fraternity brother as a broker or some State Farm guy as his insurance agent, is TIME.

Over time he can make handle the ups and downs. But the fact that the S&P peaked at around 1550 in '00, and is now in 2013 getting ready to hit 1700 means he wasted 13+ years with less than a 1% average annual growth rate. Sure, he picked up a point or two in dividends and maybe benefited from DCA'ing….assuming he wasn't one of the many that stopped putting in money into their 401k's for whatever reason (got scared, saw his pay cut or his job outsourced or his spouse got laid off….or whatever)…..but when you subtract out management fees and 401k fees, he almost certainly netted 1% and maybe less.

That my friends is a secular bear market…..and that's the world that 90% of America has lived in for the last 13+ years.

We gotta remember that people on this list are not like the rest of the country, and it's easy to lose sight of that.

I hope it is clear to everyone that I don't pretend to be something that I'm not. I don't pretend to be a counter or even a trader. I'm a simple man who was raised in a lower middle class world and 90% of my family still lives in that world. I'm not trying to raise anyone's ire with these posts. I'm just trying to shed some light on a subject that is very real…..

And maybe somewhere in my words there is a way to create even more profit for those of us that are blessed with:

1. a brain that works better than 95% of the population and
2. have a burning desire to use that brain to it's fullest.

Oct

15

Shiller got the Nobel Prize? I haven't read his scholarly papers, but from what I have read he seems prone to making blatant errors in his statistical thinking.

A common theme of his errors was to take N heavily overlapping intervals and sort of pretend that they were all independent observations. In one case he took annual stock market levels for ~30 years ("x") and compared them with the retrospectively known "present value of future earnings" ("y") summed over the following ~50 years. He then claimed that the market was irrational because there was a lot more variability among the "x" numbers than among the "y". He failed to appreciate that really the "N" for his "y" values was approximately one.

The other supposedly big insight that he had was to smooth the S&P earnings over a 10-year period to come up with a valuation metric that's averaged over the economic cycle. That's fine, but Nobel-worthy? Probably Larry Williams has come up with dozens of indicators of that sort.

Victor Niederhoffer writes: 

He also concluded that the stock market is much more variable than dividends and is therefore irrational. I guess they had to give one irrational person a Nobel and another rational person a Nobel. The terrible thing is as Tyler Cowen pointed out vis a vis the choice between the two frond runners for the Chair, one is worse than the other. As Sholem Aleichem would say, a plague on… 

Richard Owen adds: 

Mr. Shiller's work is used all over the world. It is quoted by near every stock picker fund manager and used by many in their allocations.

People state Shiller's work was "obvious". Similarly perhaps Kahneman. All this, whilst understandable, seems a bit rum. Their insights came at a time when they were heterodox to the consensus. And if his data was limited by reality, he still slugged out a conclusion. Surely that is a good thing?

If Shiller's work was easy, then good for us all that an economic Nobel is on the shelf for all of us to claim should we wish. But perhaps it only looks easy in hindsight?
 

I should imagine felt somewhat of a buzz that he could out-think the Nobels, and made a fortune from it. Professor Shiller got worldwide acclaim and academic pedigree. Both seem satiated. Perhaps Mr. Seykota is in fact correct that everyone gets what they want out of the market?

Stefan Jovanovich writes: 

Do the site readers who have Charles, Kim and the Chair's understanding of statistics have any thoughts about the fact that "earnings" changed their definition after 1913? Before that date they were, for all practical purposes, actual cash dividends because corporations did not have income tax returns. In the late 19th century it would not have been enough for the S&P's dividends to be comparable to bond yields; they would have had to be nearly double for equity securities to be seen as sound. To those of us in the bleachers still suffering from the Pirates' defeat, it seems fairly clear that neither "dividends" nor "earnings" can meet Professor Shiller's test of rationality for the entire period for which he collected data since the game changed from rounders to baseball after the 3rd inning.

It also occurs to those of us crying into our popcorn that the influences of "book value" only become important after the IRS becomes a stakeholder in the earnings of corporations. If you as an owner/promoter find yourself unable to maintain the payouts that were once "normal", the logical and rational move is to persuade the buyers of your securities that they are not just buying earnings and dividends but also assets. The Morgan Bank were meticulous about identifying the physical security for railroad debt - the deeds, trackage, mineral rights, etc. - but they made no assessments of the "value" of those assets. "Net book value" is not a term you will find in their accounts. Yet, magically, by the 1920s the term begins to appear and by the 1950s the Oregano and others have made it a metric to be engraved on the tablets of sacred financial wisdom.

Richard Owen writes: 

This is a great explanation of the money system. But the labeling of it as fraud seems quite a leap. To take just one point: the idea the fed has private shareholders. Sure, when the fed was originally set up, it was a concession granted to the participants of good value. But so was the nuclear and broadcast industries and oil rights and so many other things.

The UK bought out the boe shareholders post war. The USA they remain. However, I believe the fed has a profit sweep to the treasury so the balance sheet expansion is of low incremental profit value. Indeed the shareholders might even get a fixed coupon on par value thus it is not much more exciting or nefarious at this point than holding an 8pc government bond? But I am not sure.

The reason why the fed shareholders have never been published line by line (if this is correct)? I am not sure, but it probably is just a bunch of major banks and the 8pc on their stock is a tiny fraction of total profits. And holding the stock is perhaps is admin quirk for being a dealer or something?

As to the idea of a world without fractional reserve banking. It is possible, but a totally different economy. General Electric can either hold its working capital as subordinated creditor to a bank or cut out the banks and hold the mortgages the bank holds instead. Each has different merits, but currently not many engineering firms will accept a pile of New England mortgage certificates as down payment for a jet engine.

Stefan, is it like that? Or is there misunderstanding here?

Stefan Jovanovich writes: 

Richard raises the central question that had Americans literally at arms with one another long before slavery was a political issue of any greater importance than the Grand Bank's fishery. What is money and what is credit? What is the ultimate payment unit of account for those who want to be Keynesian traitors to the greater good by just holding cash? The Constitution offered the answer but most Republican-Democrats and a good number of Whigs quickly found that they did not like the answer. They still don't.

Oct

9

Has the ted spread inverted at 1 month? That's what I"m seeing. The money market funds perhaps can't risk a liquidity event or they would be selling CP and buying bills right now.

I don't see any trade that I can do here. All dressed up and no where to go. But what I don't understand is why money center banks aren't using their excess free reserves to buy 1 month bills. There should be essentially no capital haircut unless the new Basle rules have totally mucked things up. Something isn't working. This is down 40 SPU point kind of stuff. (NOT a prediction and I'm not short SPUs).

anonymous writes: 

The Greek Theater partial government shut down has made the plunge encouragement team lazy, or else they're incompetent. I'm looking at the entirety and it feels like I'm on a submarine or other naval vessel and the klaxon horns are going off and the call is man your battle stations. Things could get wild. Grains are very nervous, especially with export worries and that is showing up in the volatility of the basis in different areas. My mentor taught me that nervous markets generally close lower and you have an edge selling into strength in nervous markets. I never even quantified this, as I accept his advice like I accept the fact that the shortest distance between two points is a straight line.

Oct

4

I had to intervene yesterday when David Stockman gave one shibboleth about the coming armageddon after another advising people to put their money under the mattress, and to anticipate tremendous increases in interest rates, and the end of civilization all caused by the increase in the Fed's balance sheet.

I hated to have all the junta attendees nod in agreement as this ruinous guidance, similar to the chronic bear at Barrons, sunk in. At most such epicylic presentations, none have the courage to get up to present an academic, or empirical, or systematic rebuttal. But since it's my junta, I felt I had to point out that the scenario he envisioned was rated at 1 in a billion by market options, that following his advice over the years would have led to multiple bankruptcy and poverty, and that the fears he discussed in recent years were not any greater than those that occur on average every other year.

I referred him to Dimson and Ibbotsen, paid him his fee, and felt like Odysseus coming home to Ithaca to find his home overrun by imposters and suitors of the wife. It's my junta, but the economics editor of Barrons moderates it now, and he's one of those who believes that 6% interest rates are a good average for the next 10 years, as used by the "impartial" congressional budget committee.

In any case, one of the shibboleths most often bandied about is that the POMO from the Fed is the cause of all the market rises. Indeed many anecdotal reports on such sites as Zero have limned this theme. Easy way to make money. Just buy on days that POMO is in play. The days they buy the bonds and mortgages and the amounts are announced in advance on the Fed web site to give an aura of non-flexionism to it all.

But, have you tested it one wants to ask. I did with the assistance of Tim Hesselsweet.

Let's divide the days up three ways big QE buying, small QE buying, no QE buying: number of obs were 406, 258k, 144, respectively. The average move is up for each of the days and each of the afternoons. But the greater the QE, the less the average rise, but for the whole day, and the afternoon following the POMO. The average change respective: 8/10 of a point, 1 point, and 1.4 points. Where there was no POMO, the market went up the most. Thus, another mumbo jumbo, and easy way to make money, and untested reason to hate the system bites the dust.

Sep

26

Many speculators face the quandary of having to choose among concurrent position taking signals from multiple trading strategies, while also being constrained by a prudent maximum leverage level.

Beyond a simple even-split method, one could rank strategies by historic drawdown, mean-return, Sharpe Ratio, or T-Statistic, etc., or perform a back-tested simulation of different strategy combinations and levels to determine the optimal allocation.

You could also choose a system, close-out positions when indicated, then rotate the funds into others indicated to still be open (but how have expectations changed?).

Perhaps a spec could choose a combination of strategies which would form the lowest absolute intra-portfolio sum-correlation construction and fund to maximum leverage.

I've used several of these selection methods many times, and of course there are others, but is there a method for selecting an optimal allocation among concurrent trading strategies?

Alex Castaldo says:

An approximate method which has become popular in recent years (I almost said "all too fashionable") is Risk Parity.  You would allocate capital to the strategies in inverse proportion to their standard deviation. So if one strategy has a standard deviation of 15% annualized and the other of 20% annualized you would allocate (1/0.15)/(1/0.15+1/0.2) = 57% to the first and (1/0.2)/(1/0.15+1/0.2) = 43% to the second.  There is no strong theoretical justification for this, and it implicitly assumes that the strategies are uncorrelated and have similar expected returns.  But it is a simple rule that is one step beyond equal allocations.

Sep

25

One of the most fascinating bits of Ted Turner's autobiography is when he discusses his near win at either Cowes Week or Fastnet. It was the year of a huge storm and record tragic deaths.

Turner writes that, when they hit the center of the storm, he realized they had likely a one third probability of death.

He acknowledged this to himself but quickly made peace and then his primary focus remained throughout on positioning the boat for a win.

That sums him up well. 

Sep

25

The earth is going to run out of natural resources starting in 2030 according to certain flexions. Hasn't that been the mantra for a many years? But the politicians are coming up with a plan (they are always coming up with a plan.) One suspects that whatever initiative they come up will involve more government control and less personal freedom. Free markets will have nothing to do with the solution.

Pete Earle writes: 

It's funny you mention that, as I'm currently reading The Bet by Paul Sabin, which chronicles the growth of the neo-Malthusian 'population apocalypse' movement in the late '60s under Paul Erhlich and the long, subsequent battle with the economist Julian Simon (who argued that innovation and markets would blunt the unrealistic projections of the doomsayers). I recommend it.

Sep

19

It is important not to get jaded in trading. Two incidents alerted me that I may be further along that path than I thought.

1. Sometimes if you go for a drink in say Mayfair or the City, in rather busy circumstances you will find someone next to you reading the paper or a book with their pie or pint. It is sometimes my suspicion that such individuals are in reality ear-wigging for sensitive information. Although there are people who enjoy a pint with the paper alone, when you look at their dress/phenotype, time of the week/day, etc. it often doesn't seem to fit.

2. Upon seeing that someone had been mugged and stabbed in Brixton for their copy of computer game GTA 5 — a copy they had somehow gotten just before the premiere store release - my first thought was that it was a PR stunt.

Sep

17

In most of the asian hoplologic arts, footwork forms the core of basic work for the first few years. The objective is to get the novice to unconsciously transfer his weight and blend it with his forward momentum when emmitting knock-out power.

Classic case in hand is the Indonesian martial art called ‘Silat’ which uses triangular footwork to advance, sidestep, enter into the opponents space from a diagonal angle and retreat. At higher levels, the use of leverage on the opponents ankle/knee/hip come into play, thereby destroying his base even without the use of hands.

Sep

16

Bo Keely writes: Shay picked up my piece about Elvis in his Chicagoist column. Here's Shay's piece, and mine is in the post below.

Elvis walloped the ball around the court like he was strumming a guitar for the fun of it. He looked like he was on stage except with the racquet , the moves in the court comparable to his gyrations onstage , and to work the audience with his physical performance. His guitar became more of a prop, and so did his racquet.

(Elvis's eminence grise Colonel Parker wouldn't let him be photographed on his beloved private court because his flab would shake, rattle and roll to his PR disadvantage.)

Elvis and his Memphis Mafia loved the sport. E's main contenders at Graceland were touring pros: Davey Bledsoe, National Champ in 1977, an old pal of mine who worked with me and his own Nikon behind the then-new glass windows I designed for the sport; Randy Stafford, the Intercollegiate Champ and also a touring pro and Tennessee State champ; Mike Zeitman, three-time National Doubles Champion with three different partners; David Fleetwood, National Collegiate Doubles Champion who never ranked out of the top 16; and Elvis's sports physician, Fred Lewerenz, who was in the Michigan Racquetball Hall of Fame and had two years on the Pro Tour.

Other members of Elvis's Racquetball Mafia: His bodyguards Red and Sonny West; actor Dave Heble;, harmony singer Charlie Hodge; and road manager Joe Esposito. Friend Linda Thompson also played. Not a bad support group for a middling player .

Elvis was introduced to racquetball in 1968 by his then-physician Dr. Frederick Nichopolos, who told Keeley that he had started playing in 1955 at the Nashville Jewish Center by sawing off the handle of a tennis racquet. The doc coached his son Dean and a few other beginners, then moved his practice to Memphis in the mid 60's and coached Dean in his partnership with young Marty Hogan (who would become the sport's Babe Ruth and all-time highest money-winner. And a good friend and co-author of mine who helped get me into the Racquetball Hall of Fame recently for my pioneering photography that helped make the sport international.) When "Dr. Nick" began treating Elvis for saddle pain from his motorcycle riding, this blossomed into a lifelong friendship during thousands of racquetball games."

I'll spare you the almost infinite loving detail of Keeley's account, which will probably become a book, except to share some of the Elvis racquetball mystique:

Elvis wore white tennis shoes , shorts and huge safety goggles. White headband and white glove. He played day and night before heading out into the dark streets of Memphis and, presumably, its fleshpots. On his motorcycle, with his bodyguards and the Mafia in sidecars, they hit movies and nightclubs. The week before going on tour Elvis wore a rubber suit with tight wrists to sweat off five pounds. Bledsoe said he thought it would help him look good for his fans.

He had a strong forehand as an extension of karate, a standard club backhand. "To be honest," Davey adds sadly, "he wasn't much of an athlete. He just wanted to move around and get some exercise." He did love the game and ended up building a $250,000 court in back of Graceland. Bledsoe sadly compares Elvis's racquetball to his own singing voice: "Horrible."

Steve Smith adds: "Elvis loved the game like he loved Gospel—he just belted it out." He never played "on the road." The fans would've mobbed the courts.

FULL STORY here.

Sep

12

This is an interesting article for the layman about the changing gravitational constant. One part that intrigues me is their hypothesis that maybe the nature of gravity (the form) is changing and that some other force might be changing it. Or maybe gravity is subject to oscillations? Any change could have interesting consequences.

Gyve Bones writes:

A rather weighty and grave subject for this site, eh? I reckon it falls under the category of ever-changing cycles, and perhaps, BBQ.

Gary Rogan writes: 

It's almost funny to see these scientists very concerned about the possibility that G is changing without much concern about what, in our universe (other than some supposed new field), really determines why it has any specific value vs. any other value or why it's at least somewhat constant through the Universe. Why shouldn't it change, if you have no idea how the value comes about in the first place?

Jeff Watson adds: 

But then again, if gravity can change form, can time and space be far behind? And I'm not talking Discovery Channel stuff.

Gary Rogan replies: 

ANYTHING where you don't understand the root cause (and even then if your understanding is wrong or incomplete) can change. All the fundamental physical laws are basically just observations that haven't been contradicted YET, and all the social science/market "laws" are just observations that at some point seemed correct to enough people. 

Jeff Watson writes: 

I suspect that F=MA would stand the rigors of any test in the macro realm. PV=nRT would probably stand up also, as well as V=1/2 AT^2. The fundamental Newtonian physical laws are pretty intact and have been proven in a variety of ways. Had the physical laws been incorrect, man would have not been on the moon, we wouldn't have landed a rover on Mars etc, Ohm's law(among other things) would not have be proven and I would not be able to communicate with you in this venue. And " the social science/market "laws" you make note of are more of an art than a science. I apply science to markets every day, but along with the science, I also use the art taught to me by my mentor to achieve a small degree of success….sometimes.

Sep

10

David S. Landes, a distinguished Harvard scholar of economic history who recently passed away, saw tidal movements in the rise of seemingly small things. He suggested that the development of eyeglasses made precision tools possible. Maybe, he said, using chopsticks helped Asian workers gain the manual dexterity needed to make microprocessors.

In more than a half-dozen books and scores of articles, Professor Landes's writing was often as light as his subjects were heavy. Reviewing his 2006 book, Dynasties: Fortunes and Misfortunes of the World's Great Family Businesses, for The Times of London, Christopher Silvester described the writing as pithy, thoughtful and sprightly. The book offers 13 sketches of tycoons, including Henry Ford, John D. Rockefeller and Armand Peugeot.

I love this quote:

"…..In one scene Nathan Rothschild, of the legendary financial family, is hard at work at his desk in London. A peer of the realm is brought in. Rothschild, intent on his ledgers, invites him to take a seat. Offended, the visitor blusters about his high standing. "Take two seats," Rothschild says….."

Sep

10

As I work on brushing up writing skills for a potential book on my journey as a caregiver to my wife for 30+ months, I happened across a collection of advice for writers Hemingway sprinkled through his correspondence with colleagues over the years. Wisdom for the ages?

Life lesson:

"Listen now. When people talk listen completely. Don't be thinking what you are going to say. Most people never listen. Nor do they observe. You should be able to go in to a room and when you come out know everything that you saw there and not only that. If that room gave you any feeling you should know exactly what it was that gave you that feeling. Try that for practice. When you're in town stand outside the theatre and see how the people differ in the way they get out of taxis or motor cars. There are a thousand ways to practice. And always think of other people."

And for traders as well as writers:

"Dostoevsky was made by being sent to Siberia. Writers are forged in injustice as a sword is forged."

It makes me think of all the injustices bestowed upon newer traders; complexity, bad prices, one's own emotional state, the non-obvious inner circle game– the list is endless.

Sep

6

On a 2000 mile (round trip) road trip with the family late last spring, I had ample opportunity to sample the various fast food outlets.

I made a point of trying McDonald's newer, "innovative" fare, while my wife stuck with the classics.

My impression–atrocious! Dismal food quality, taste, and presentation.

When I got home I was so disgusted with the experience I sold my McDonald's stock (MCD).

.

. 

Sep

5

Judge Andrew Napolitano will be speaking at the Junto on Thursday on the rule of law.

Usual place: 20 West 44th St, NY NY. First floor reading room. Start 7:30pm. All are welcome. 

Sep

3

In August 1998, I ran foreign brokerage for Refco out of Moscow, and most of my local clients kept averaging down in Russian Ruble futures, as the currency accelerated in its worst bear ever. Personally, I was a lucky Short from around 9.0000 of months ago and I patiently hung on through daily slides, as they were now breaching 7.0000.

This futures contract was now listed at the CME, but participation was still spotty. So that Friday the contract gapped down slightly below 7.0000 at the open, but it began slowly rising through its six-hour session, creating a possibility of a key reversal bar near the close around 7.0300. However, I noticed that with 60 seconds left on the clock, there were no bids showing in the book higher than the stale 6.9811 bid unabled un the morning. So with second remaining, I call the floor and ask the broker to post 6.9812 offer for a single lot. He barely managed to post it to the board, as the bell rang. Well, I sold nothing — but the day's settlement price has now shifted back below the 7.0000 for the first time in history, and it was the week's close no less!

So lo'n'behold, some heavy currency hedging activity kicks in as the Russian exchange opens next Monday. It was even rumored to have Palindrome fund connection to Vimpelcom purchase, where he ended up losing hundreds of millions during the ensuing government default. The official Russian default/devaluation declaration followed that week, gapping the devalued Ruble all the way to 4.0000 handle!

Sep

2

In our shop we monitor various forms of taxation because (a) the reports are the only daily macroeconomic data other than price, and (b) the data is raw and as such unintelligible to the journalists, who consequently ignore it. Regarding the latter point, most people wind up getting their information from journalists, which as a competitor I think is great.

What we know:

First, the Non-Farm Payroll report is due out this coming Friday. It's going to be weaker than currently imagined. Big time. Note that there was an effective 2 percent increase in payroll taxes starting in January. In a perfect world a non-thinking bureaucrat (excuse the redundancy) would expect a 2 percent revenue increase. But people (and employers) vote with their feet so to speak, and the bureaucrats get less. So much less in fact that the YOY payroll tax growth is now negligible. For those of you familiar with the work of Art Laffer, this exemplifies his famous curve. Some of the decline in payroll taxes may be a result of the sequester. But it does not matter; the point is that when one considers the tax increase, there is a decline in the growth of hours_worked * wages. There is no way to paint a smile on that information.

Second, tax filings by corporations show negative YOY growth that just started recently and has not happened for some time. That is perfectly logical as businesses are curtailing expansion because of Obamacare, and for lots of reasons are flush with cash. What they should be doing is investing, but that's not happening now. Given the amount of cash around, one would also expect more M&A activity. Not significant there.

Third, tax payments by individuals other than payroll deductions have negative YOY growth, pretty much in parallel with the corporate filings.

Fourth, growth rates of import duties and excise taxes, good surrogates for discretionary retail spending, are negative YOY. Big time.

I have put up charts of the above (1, 2, & 3) recently, but if anyone has a specific request, I will accommodate.

Opinion/analysis:

Can someone be at the pinnacle of power and be grossly incompetent? Of course. It's hard to think of a Presidency that has not done something egregiously stupid. However at some point you have got to say to yourself, "they simply cannot be that stupid; there has got to be another reason." That's where I am at now.

I think Syria is a Wag the Dog scenario. The questions are why, and what are they covering up? From my foregoing information I think it's the economy. By the way, I am not implying any illegal actions on the part of anyone. Some doctors do not tell their patients the full truth, so why should we expect something different from our political leaders.

Aug

30

For those interested in reading up further on the flexions and Ms. Wedel's work, the latest issue of Pacific Standard magazine has a nice introduction to this aspect of her work titled "Meet the Flexions."

I only have the print version and am unable to link to a soft copy, but the website for the magazine is psmag.com.

The article is particularly timely with the Prime Mover lately attempting to transmogrify himself into the creature from Jekyll Isle by sheer force of flexionic will.

Aug

29

A couple of weeks ago we had a back and forth about the bond market's behavior. I want to add one more possible explanation to my list of "whys." I read a pundit last night arguing that the iMarkets have a ton of foreign reserves … and that's why this won't be a repeat of 1998. Interestingly, this is possibly bearish for US Treasuries. That is, the iCOUNTRIES may be selling their treasury holdings to support their currencies in the face of capital flight and a growing balance of payments deficit. This might continue until they run out of money and are forced to have violent devaluations. Just a thought…

Aug

26

"Runner Larry Williams Takes First Place in Five Events"

Scott Brooks writes:

Congratulations, Larry!

Al Mabry writes:

Is that a picture of Larry…or Mark Spitz?

Jeff Watson writes:

Most heartfelt congratulations Larry.  It takes a lot to impress me, and I am impressed.

Larry Williams writes:

Thanks to all for the kind words.

It was not as much if an accomplishment as it might appear. There were only a few other competitors in my age bracket this year. In some events I was the only one.

Getting back in shape (a year ago I was on crutches for over a month) was the real accomplishment as I see it. Stressing and old body and getting back into a training routine was comforting. I had been there before and it felt really good. Just really slow. Adapting, well trying to adapt for the altitude, was a challenge that I failed.

My real 'victory' was the joy of competition and meeting other old guys to run/play with. When we lined up for our races we invariably would forget our lane assignments; once we realized that we all really got a good laugh.

Happy trails to all.

Aug

22

The fact that the Dax was up 3 ratio points against the US markets shows that the largesse of the flexions on our numbers is not withheld from those who make recipes for the bernaise and bechamel sauces in Brussels .

Alan Millhone writes: 

Dear Chair,

Am afraid the bernaisacky sauce might upset my stomach.

Note Dow was below 15. That is upsetting enough to many without adding any sauces.

Sincerely,

Alan

Kim Zussman writes:

It was dyspepsia from absence of Bernanke sauce.

Peter St. Andre writes: 

I really need to write a little poem that starts with "Ben Bernanke makes me cranky"…

Gary Rogan contributes: 

There once was a man named Bernanke

Engaged in some bad hanky panky 

But he went AWOL

and skipped Jackson Hole 

And now the markets are cranky.

Craig Mee adds: 

Bernanke the captain of Fed
Resembles Titanic's, Smith Ed
Evades all bergs, engines full out
Bond infinity, no damnable doubt
"Untapered, untwisted, now screwed", he said.

Aug

21

I found this collection of "40 Maps That Will Help You Make Sense of the World" quite fascinating and a few are important to know.

Aug

19

On the way to my graduation from Purdue two weeks ago, I headed to the light rail to travel to the airport.

As I awaited the train, a slew of grown men dressed up in My Little Pony garb were on their way to a conference about four blocks from my apartment. Baltimore in successive biweekly periods has hosted a My Little Pony convention for adult men, Comic-Con (sp?), and soon a Grand Prix race that annually loses millions. But it is the former that was so bizarre to me, that I was very pleased to reach this article, which may be one of the most random, insightful, odd, and funny analyses of academia, counterculture, and exercises in wearing random costumes in public.

Enjoy or shake your head… this is a step into the weird…

"The Dread Pony"

Aug

13

This article shows results of experiment on the E-Coli bacteria detailing the survival or death of the bacteria in response to the way it handles introduced exogenous stimuli. The upshot is that small changes in exogenous conditions can lead to large substantial differences in outcomes. Surely a rich field for market related phenomena looking at how small changes in one input (say rates) may lead to large movement in other markets (say currencies) when the dependent variable is already under some stress.

Pitt T. Maner III writes: 

This is a really interesting field.

It looks like bacteria have been "hedging their bets" for quite some time. And they have a type of "memory" that influences their response to current environmental conditions. On a larger scale it is interesting to note what happens to the ecology of a system when a "keystone species" is removed. The field of "synthetic ecology/biology" looks to have important findings for a wide range of fields and the bacterial algorithms already developed are being used for engineering problems.

1. "Bet-hedging in stochastically switching environments":

"We investigate the evolution of bet-hedging in a population that experiences a stochastically switching environment by means of adaptive dynamics. The aim is to extend known results to the situation at hand, and to deepen the understanding of the range of validity of these results. We find three different types of evolutionarily stable strategies (ESSs) depending on the frequency at which the environment changes: for a rapid change, a monomorphic phenotype adapted to the mean environment; for an intermediate range, a bimorphic bet-hedging phenotype; for slowly changing environments, a monomorphic phenotype adapted to the current environment. While the last result is only obtained by means of heuristic arguments and simulations, the first two results are based on the analysis of Lyapunov exponents for stochastically switching systems."

2. "Memory in Microbes: Quantifying History-Dependent Behavior in a Bacterium":

"Your average bacterium is unlikely to recite π to 15 places or compose a symphony. Yet evidence is mounting that these 'simple' cells contain complex control circuitry capable of generating multi-stable behaviors and other complex dynamics that have been conceptually linked to memory in other systems. And though few would call this phenomenon memory in the 'human' sense, it has long been known that bacterial cells that have experienced different environmental histories may respond differently to current conditions [1]–[3]. Though some of these history-dependent behavioral differences may be physically necessary consequences of the prior history, and thus some might argue insignificant, other behavioral differences may be controllable and therefore selectable and even fitness enhancing manifestations of memory."

3. The work of Professor Robert T. Paine and the concept of the "keystone species" where an organism has a big effect relative to its abundance:

"It was a ritual that began in 1963, on an 8-metre stretch of shore in Makah Bay, Washington. The bay's rocky intertidal zone normally hosts a thriving community of mussels, barnacles, limpets, anemones and algae. But it changed completely after Paine banished the starfish. The barnacles that the sea star (Pisaster ochraceus) usually ate advanced through the predator-free zone, and were later replaced by mussels. These invaders crowded out the algae and limpets, which fled for less competitive pastures. Within a year, the total number of species had halved: a diverse tidal wonderland became a black monoculture of mussels1."

anonymous adds: 

OK, what about Slime Molds (particularly, Dictyostelium discoideum). It has the absolutely stunning biological characteristic that it spends much of its life as thousands of individual cells and other times as a single entity.

When times are good for Dictyostelium doscoideum its 'cells' wander off and enjoy themselves. However, in less hospitable environments the 'swarm' of cells coalesce and form a single entity.

Apparently the cells emit acrasion (or AMP) that contains information useful for other cells

When things are starting to look tough the cells pump out increasing amounts of AMP and the cells begin to cluster….Other cells follow these trails and increase to mass towards it completed whole.

Now, I wonder about the stock market. During the regular upward movements most of the components are doing their own thing, following their oscillations generally higher…. When 'it' hits the fan, the correlations between the stocks increase rapidly to 1.0 and they form a single bearish, growling entity.

Now without pushing the analogy too far, I wonder if stocks 'transmit' statistical information (AMP to follow the analogy) to each other (in this context they would not transmit as much as 'exhibit' some form of common statistical behaviour) that forced the behaviour of component stocks into a more correlated state.

Testing possibilities are legion.

Gary Rogan writes: 

My general objections to giving some purpose to the market have to do with incentives, or more precisely lack thereof to do anything in particular.

I read a whole chapter of a book on a slime mold presented as an altruism study. The reason it was presented like that is that when the individual slime mold cells cooperate, only the lucky few that join the growing "mushroom" at the right time get to propagate because they get to form spores only at a particular state of development of the hastily arranged colony. Nevertheless, when presented with a choice of dying for sure or maybe propagating (and the cells only cooperate when they are close to death) they chose to cooperate and propagate. There is also some amount of deception involved when the cells jokey for position, but not a lot, since any particular placement is hard to achieve.

What is the equivalent reason for stocks to cooperate?

Bill Rafter writes: 

Should what you say about stocks transmitting statistical information occur, it would mean a relative decline of idiosyncratic volatility. That is something we have studied, and found that when the going gets tough, the idiosyncratic vol grows faster than the market's vol.There are some other measures of "group think" that are good indicators of both the broad markets and individual assets.

I would posit that stocks do not transmit info, but their owners do. Consider the case of futures in which one market takes such a hit as to require significant margin calls. Human nature being what it is, the public sells its winners to finance its losers, and non-related markets dive along with the primary.

Aug

9

There are three videos in this article, all of them are quite fascinating. The last one I found particularly cool — a sandbox for science museum installation that demonstrates how topo– maps work by projecting color and topo lines onto the sand. Watch as he makes it rain with his hand and the system shows the water flowing off the watershed and pooling in the catchment areas.

"Here’s what the immersive, 3D computer interface of the future will feel like"

Aug

8

How did newspapers make money anyway?

Formerly the bulk of newspaper revenues came from Classified Advertising with margins in the 80-85% range. Biggest income producers were Help Wanted (especially those ads aimed at "Executives and Professional." Now Monster.com and others have reached a far broader readership, with an easier search protocol, and the ability to submit resumes electronically.

Two other big money makers were Real Estate (private home sales, home rentals, and apartment rentals (really big in urban markets)), and Automobiles (mostly used). Once again the net won out by incorporating 360 degree filmed shots of all rooms in a home/apartment - readers no longer had to trust in veracity of copywriter (me). Use of pictures for autos on web was a big reason for shift - again a picture was a better sales tool than words. But a newspaper ad with a pix cost way too much

General/National advertising (Ford/MacDonalds/Proctor & Gamble/Nike, etc) were big income producers but split their "buys" and had already begun to move more into TV — local dealers/retailers/food marts/electronic stores, though, spent tons - moved some of that to the web also.

Absolutely huge dollars and margins in political and/or issue advertising — especially campaign ads. Definitely paid the highest rates with NO discounts for frequency of ads or number of appearances.

Retail advertising was very competitive and, consequently, margins were much smaller; many of these advertisers switched some of their advertising to the web but few switched it all.

The big money makers in newspapers remain those in smaller markets with lots of elections and, ideally, without a nearby Wal-Mart. Generally, most smaller towns are one-paper markets and rates are set to insure generous margins (Gannett owned very many of these and they add substantially to the bottom line). However, consumers of local papers like to see bylines by local people — and they demand that coverage be provided for most civic events that big papers would normally ignore (so if the publisher gets too pricey or too indifferent to local events, the staff hears about it, and advertisers act on it). Locals are also are very interested in coverage of high school activities (football, band, and cheerleading are huge.

Political advertising for every office from the Prez down to county Animal Control Officer bring in dollars — local radio gets very little of any as most stations have limited reach and few committed advertisers.

Aug

8

Zimbabwe is opening a stock exchange that will only trade shares "appropriated" from other parties. Only blacks may participate.

"Zimbabwe to open a "blacks only" stock exchange"

A commenter adds:

Words fail me. But if there was one country in Africa that needed foreign investment more than Zimbabwe, it would have to be the CAR (or whatever it's now called). If there were any capital left in Zimbabwe that could be moved out of country, I'm sure it's already moving. I guess it will be another generation before the country gets its act together and develops a legal system worthy of the name.

anonymous writes in: 

I used to live in Zimbabwe and now live in Durban South Africa – but I go visit frequently.

I would move back to Zim tomorrow if Mugabe went.

Zim runs totally on US dollars – banks ATMs, all cash is the US dollar.

The economy is starting to pick up again and the shops are starting to fill up with foreign goods.

But Mugabe and his sidekick the Indigenisation Minister Kasukuwere are the problems – both are bloody mad.

But that said Mugabe is one of the healthiest 89 year olds I know.

One thing is for certain – every election Mugabe makes outrageous statement of his future intentions- then he rigs the elections - wins -repeats his outrageous statements at his victory speech - then you never hear anything again.

But there is always a first time with this mad man.

Aug

6

There is an apparent flexionism transpiring in the current market environment. The fed flexes their views in deciduous media blurbs while trying to manipulate an asymptotic rise in asset prices.

One is reminded of the war strategies used by the ancient Nuntsekai warriors of the Middle East in the 12th century.The strategy was initially applied with commingling of deceit maneuvers in association with subordinated and mischievous assemblance of morale loss. What then followed was a stochastic attack maneuver which created chaos and confusion in the midst of initial optimism.

Aug

5

I am often asked if I really believe that all the technicians, and specialists and Phd's from Harvard and other places, the ges 10's and above making 6 figures on the steps with their 25% increases for the discomfort of living in NY, SF or DC, and the ses's with their even highers, and all their educations, including Harvard Phds and research positions at important public minded institutions, and teaching positions at top 10 universities, e.g. the head of a certain department that issues important numbers the first Friday of each month, whether they actually could stoop so low as to fuzzify a number. After all, they have procedures, checks and balances, and many employees going through the revolving door.

In most cases, not counting such things as the 15 foreign embassies that were attacked on that day the dignitary died, before the important election, which was completely suppressed, with the red herring of the documentary video, I don't think such eminent personages would stoop to that level proactively. Thus, the 0.1 decline in the rate if you asked them, they probably would believe it to be completely on the up and up, four square, and totally unbiased.

But let's be reasonable, what kind of people are able to go against the source of their income—- to fail to protect their own house. The invisible hand works. They all know what is necessary to protect their house, and one would presume that 95% of aforementioned higher up would have seen the virtues of keeping the middle class on a beneficent spiral of takings from the upper class and keeping the rest of us small i.e. the idea that has the world in its grip. So without a pencil being pushed, a change being made, an adjustment to the hedonics…it happens. And it's perfectly four square and it happens in accord with the idea, I think.

Aug

5

An amusing piece from out Japanese friends. 

"Tokyo Traders Gear Up for the 'Curse of Ghibli'"

Aug

5

A former CLSA guy does a Monday morning quarterback review on Tony Bolton (and others) failures in the Chinese equity markets.

anonymous writes: 

The disconnect between the professional research community's views and the performance of the Chinese equities available for non locals to trade over the last 5 years is quite depressing.

I remember two years ago stock brokers closing down by the score in the UAE …. The markets had not shared in the wider worlds rally since Mar 09. The performance of the UAE since has been far superior. I fear China is nowhere near this type of 'uncle point'. The demographic , 500 million joining the middle class in China etc etc etc. was priced into the super exponential rally that ended a few years ago.

Take a look at a weekend newspaper Sunday personal finance supplement from a few years ago.  Nothing but Asia this & Asia that….

How about this — the next 50 years to be about the economic resurgence of the United States!

We'll see this story in the papers after after the USA outperforms China over the next 5 years or so.

Aug

1

What is the cause of this 10 trillion miss if not the opportunity cost of the bailout and buying of bonds and mortgages by the Fed, the expansion of their asset base, the main accepted principle of macro economics that providing high powered money will create a multiplied effect on output. 


"Is Life Still Good If You Miss Out on $10 Trillion?"

"A new analysis from the Federal Reserve Bank of Dallas provides a broader perspective on the weakness of this recovery and the damage caused by the crisis. They estimate that the shortfall in GDP from 2008 through 2023 amounts to about $10 trillion in today's dollars."

anonymous writes:

Retrospectively, It would have been fascinating to see if the animal spirits could have sorted things out better than the 'rescue packages' of our overlords. I suspect that with the same level of regulation as we had pre-'crisis' the difference would have been, inter alia, that we would have lost two or three of the 'global banks'.

The volatility of economic conditions would have been a little higher for a short time. There would be more smaller competitors now in many industries providing better levels of service and competition. The distribution of the economic gains since the lows would have been shared amongst a wider set of private enterprises rather than the 'semi private' banking sector.  

Jul

24

I heard something on NPR this morning (from the CEO of Mashable) which got me thinking about Apple. Consider: Back in the early 1980s, Apple was flying high–it occupied the high margin section of the emerging PC industry and it was making lots of money. Its CEO Steve Jobs was seen as a major entrepreneur. However, by the mid 1980s, Apple had lost its way, as it maintained its margins even as it lost market share. Jobs had been jettisoned in favor of someone with no computer industry marketing experience. Apple maintained many of Jobs' hires as Apple saw its market share shrivel. The high flyer then was a software company whose offerings ran on a host of hardware platforms–Microsoft. Everyone could use Windows and everyone could use Office. Now, fast forward a generation: Apple is again flying high, determined to hold its profit margin even as it loses market share. But there's a new kid on the block offering a mobile operating system used with different hardware platforms: Android. And Jobs is no longer running Apple. And Apple is again run by someone lacking computer industry (or consumer electronics) marketing experience.

Looking at this picture, I have to wonder if it isn't deja vu all over again. Now, I know that Apple has gazillions of cash that it can use to buy companies, but I'm looking at which of its acquisitions has been that helpful to its bottom line. Not much help that I can see. Kind of like Cisco during and soon after the dot-com boom and bust. Lots of money, not much to show for it. Its products are looking dated (and some products, like AppleTV, haven't appeared at all), several products have been introduced though they no longer elicit the oohs and ahs that characterized the products commanding the profit margins associated with Apple. Its execution on the software side has been little short of awful (the cloud in particular is something Apple doesn't get), and it no longer commands the attention of young engineers in the manner that it once did. And while it's PE is low, there's nothing to suggest that earnings will stay healthy, particularly if profit margins give way.

Is history repeating itself?

Gary Rogan writes: 

Apple is followed by zillions of super-smart people who track every available piece of information, many in real time. It also has a lot of moving parts and a lot of very smart people working for them. I doubt it's feasible to make money by out-thinking them all without some identifiable edge.

anonymous writes:

Didn't they say the same thing about Japan in the mid 80's?

Gary Rogan responds: 

Did Japan have a P/E of 10 and down almost 50% from its recent peak? There doesn't seem to be either irrational exuberance or irrational despair about AAPL but there is frenetic interest. It's latest numbers resulted in some pretty healthy volume after hours and a reasonable jump. Who knew how much it would jump and in which directions? Someone probably did, but it wasn't on the basis that Apple doesn't get the cloud. The point is, if there was ever an efficient market this is it. Not always, not for all time, but for here and now.

Jeff Watson writes: 

Isn't every stock that's not on the Pink Sheets followed by a bunch of super smart people who get tons of info in real time? Do you think the market makers have a pretty good estimate of the value of the stock? Don't insiders in their particular companies know if their stock is too cheap or too expensive? Just because AAPL is a cultist type of phenomena, please don't ascribe mystical powers to the stock. It's going to do what it's going to do, without any regard for the super smart people who follow and trade it. In fact, personal experience tells me that the super smart people are going to feel the most pain.

Gary Rogan retorts: 

I don't ascribe any mystical powers to it at all. It's a stock constantly in the spotlight. In my experience, there are "sleepy" stocks and there are highly followed stocks, in the sense of constant attention being paid to them everywhere. The market seems less efficient in the stocks that are not in the news all the time. If you have a long time horizon, and the highly followed stocks is showing signs of a mania, it may be a good short candidate, and the opposite if there is widespread despair, but it's hard to know. Of course it will do what it will do, I never claimed otherwise, but ruminating that their CEO, who at some point was in charge of worldwide sales, doesn't get marketing or the company doesn't get the cloud, or that Jobs is dead, or that there is this new kid on the block called Android would get you about as much as edge as me claiming that the world population is growing and needs more wheat and therefore going long wheat.

David Lillienfeld weighs in: 

Let's deal with these one at a time, and keep the emotion out of it.

First, Tim Cook was EVP for Sales and Operations, but insofar as he's never held a marketing position in his career (certainly not as long as he's been at Apple), this position seems as much organizational as anything else. His marketing value-add seems to be pretty small, if not nil. Fact. Cook's role has been manufacturing, and he executed pretty well. But that's quite a ways away from marketing, I think you'll agree. There isn't any report suggested that Cook has ever had any involvement in marketing other than this title, and one must note that at the time Cook was placed into the position, Jobs was handling marketing himself. Fact.

Right now, Android is doing to iOS exactly what Windows did to Mac OS in the 1980s. Fact. Apple kept a closed system and IBM/Microsoft an open one. Guess what. The open system won. When the Mac came out, one of the things seen in its favor at the time was that, much as happened with the Apple 2, there was software around to run on it. Same thing today–except it's now in the form of the App Store. Again, fact. We're now seeing the same thing happen in mobile. Google may not be able to monetize Android, but that's probably a matter that will be dealt with once someone figures out how to monetize mobile. (That's opinion, but one I think is supported by facts.) Do you deny that Android has taken market share from Apple, that it's more widely used than iOS, or that iOS doesn't seem to have much place in the low margin East Asia market? Moreover, Apple focused on maintaining margins rather than going after market share–both during the 1980s and also during the recent period. Fact. Earlier, that turned out not to be the way to success. Fact.

As for Apple being followed, that's irrelevant. Apple was heavily followed in the first half of the 1980s. I remember it well. By the latter half of the 1980s, it was no longer followed because it was in the process of becoming irrelevant in the face of Windows. By 1997, the company was on the verge of bankruptcy with 90 days of payroll in the bank. Fact. That's hardly the setting for a followed enterprise. Successful companies are followed. When success disappears, so does the following.

Lastly, if you think Apple gets the cloud, then I suggest you review how Apple's efforts in that space have fared compared with its competitors. I know of few who would opine in favor of Apple's efforts, even the cultists. Let's not forget that fantastic roll out of Apple Maps. Fact. Enough said.

I also noted that Apple has lots of money to work with, but then again, back in the early 1980s, it did too. (It's worth remembering Microsoft was similarly fortuitous–and well followed–and I don't know that it has a similar following today as it did in years past.)

That a generation has grown up since Apple's last appearance in similar circumstances of adulation also suggests that the younger minions may have forgotten that Apple's earlier escapade didn't result in hegemony–far from it. Fact.

As for Jobs, the reality is that since Jobs died, Apple hasn't functioned anything close to what it did when he was around–and he was active until about a month prior to his death. Fact. He may have picked the management team to succeed him, but much as happened back in the 1980s, without Jobs, that team didn't perform well. The contrast with, say, Alfred P. Sloan or Andrew Carnegie, or John D. Rockefeller, or David Hewitt or Adolph Ochs, or Robert Noyce or … I could go on, but the one thing that separates this group of CEOs is that when they stepped down as CEO, it took at least two generations of managers after before the company hit much of a bump. That's the mark of a great CEO–in addition to what happened to the company on the CEO's watch. Jobs didn't do so well with it in the 1980s, and it appears he didn't do so now.

If you don't like the facts, that's fine. Don't like them. But those are the facts. I'll leave the other elements of your comments for some other time.

But let's stick to the facts.

anonymous writes:

Let's cut to the chase. Tell me the long term growth rate of AAPL's earnings and I'll tell you (+/- 10-20%) what the stock is worth today. The bloomberg consensus growth rate is 19%, so the stock is worth about 1090/share.

If you cut it to 10%, the stock is worth 512/share.If you use a 5% long term growth rate, the stock is wroth 340/share.

The primary reason that 19% is wrong is that AAPL is simply too big to grow at that rate — or it would suck all of the oxygen out of room. At 442, it's priced for about a 8.25% growth rate. Not crazy, but 8% is still a lot of growth for such a big company. But their buyback can provide a lot of help in achieving EPS growth. BUT — the chart looks good! 

Jul

23

I was driving through a McDonald's pick-up window this morning when I heard the earnings news.

As a fairly regular McDonald's customer, I feel I can explain the headwinds that they face. Their problem is that their food is too expensive for what it is. Their fish sandwich is a tasty little thing, but "little" is the operative word. It has a patty of fish the size of a postage stamp, and it costs $3.99! In order to eat to my own satisfaction at McDonald's, I have to get at least two "entrees" — something like a fish sandwich and a "southern style chicken" sandwich (read "knock-off Chick-fil-A"), but by the time I've paid for that, I could have had an excellent, fresh meal at Chipotle. Similarly, if I order one of their "premium" burgers like the "Angus" whatever, I'll get a burger that's been microwaved and is not particularly fresh, and I'd pay the same price as that of a much, much better product at Five Guys.

Probably there are better economic opportunities on their "dollar menu", but they don't put those front and center — they try to pitch to the high end (relatively speaking), and they're just not competitive there.

Jul

23

I note that two fairly high profile properties along the beach in Malibu have cleared (David Spade's home & Kurt Russell/Goldie Hawn's home). Both were on offer for circa 15 million last year and have cleared at circa. USD 10 million. I also noted substantial East Coast properties clearing well below recent years' asking prices over the past 12 months. The system works in the USA– Across the whole spectrum of prices. It is markets that have not had a discontinuity is two decades (Notably Australia & Central London) that appear headed toward a negative air-pocket.

Jul

21

In the new millennium there have been 427 60 day highs in the S&P with the expectation 10 days later zero with 60% up and 40% down There have been 157 60 day lows with the expectation 10 days later + 1/2 % with 66% up the results are similar for 120 day highs. We're at an all time high in the S&P. It has been a triumph of the optimists. 

anonymous comments:

Triumph of this summer indeed. May I be assured that similar observation projected bullish odds in 2009, when taken near the 667 low… I think calling the return to 667 is absurd, but the next adjustment to US socio-economic reality could briefly revisit 1000-1100 at any future point. So whose triumph is it? Perhaps no one's.

Jul

19

At 10:00 AM today, New England's power markets broke $600 per MWh (normally, it is $20 to $40). At 12:10, it broke $700. The peak is not expected until 3:00 PM. In the meantime, prices are volatile.

New England is out of natural gas, nuclear, coal and renewable energy (wind does not work well in the summer). It is now relying on fuel oil to fuel power plants. It is also dumping lots of water into hydroelectric units and importing power. New England can import limited amounts of power from Canada and Mid-state New York.

If you want to watch the action, visit the grid's dashboard.

Jul

19

I recently read Jimmy Conner's book The Outsider, a Memoir.

Although a little sugary– too much mama this and mama that, wife this, wife that– and if you can get past the tedium of the same old guys going out to party– Jimmy and Nastase did this, Nasty did that– the book is down right unremarkable, however it was interesting to follow the birth and growth of popular tennis.

When I mentioned to two different people that I was reading this book the quick item brought up was that Jimmy married Chris Evert, right? Well, they were engaged, an item. Conners was chasing her around the tour when she was 17. He mentioned that her Mom was always around and that Chris was heavily guarded. He never married her but married the 1977 playmate of the year. He professes to not have been a drug guy ever and a non-partier until he basically hit his life long goals of winning wimby and the US open.

A few items I think you would be interested in:

His grandmother and mother trained him from a youth (St. Louis area), as did his grandfather some. His father was around but was overshadowed by the ladies of the home who nurtured him. His mom was a good tennis player and taught him a solid game. He did not do well in school.

His grandfather made him jump rope. Jimmy would have to jump for some period of time without a mistake or the stopwatch got reset. Jimmy would ask how much time and grandpa would say 10 minutes, then grandpa would change his mind after seven minutes and say, no let's do 20 minutes. This would mess with his mind. Grandpa would sometimes walk around close or behind Jimmy when he was jumping to make him feel rattled–if he made a misstep he would have the clock restarted. This in reflection was done to make him ignore distractions.

His coach, Pancho Segura–from wiki here: Pancho "Segoo" Segura, born Francisco Olegario Segura on June 20, 1921, is a former leading tennis player of the 1940s and 1950s, both as an amateur and as a professional. In 1950 and 1952, as a professional, he was the World Co-No. 1 player. He was born in Guayaquil, Ecuador, but moved to the United States in the late 1930s and is a citizen of both countries. He is the only player to have won the US Pro title on three different surfaces (which he did consecutively from 1950-1952).

Pancho to me was very interesting and I would like to read more about him. He would draw up a game plan for Jim on napkins before each match. Conners had a solid game and was able to form a strategy that basically shielded him from the adversary's strong points.

Conners had OCD which came out in his behavior after winning Wimbledon. He would bounce a ball endlessly and not be able to pick it up and toss it up to serve, or he would have to check the locks on his windows and doors before going to bed multiple times, drive from the hotel to the game location at a certain time and with exactly the same route. In those days no one knew what OCD was. He just dealt with it.

He was and most likely still is an action junkie. He gambles and loved the playboy clubs. He would bet on himself to win tourneys. It was legal to do so.

He won 109 event championships, his enemy of sorts was Johnny Mac who knocked him out of first in world ranking.

He was a tenacious player, a fighter, a little guy who had to scrape for everything. He had slips of paper in his shoes outlining concepts to think about from his grandma when it was break time between sets.

The trading/life related item was when he first won his Wimbledon title. He said he was mentally in tennis nirvana. Pancho (genius move in my opinion) took him the next morning over to a local children's cancer ward for half a day to talk with and entertain the children who were suffering. He said his cloud 9 turned into a cloud zero as he saw what was really important. We can all use this lesson reminder in some form or another.

Charles Pennington adds:  

I share your thoughts on the Connors book. "Unremarkable" is a good one-word description. Autobios by Agassi and McEnroe were real page-turners, though they didn't always make the authors seem like admirable people.

The opening parts of the Connors book, which cover his childhood and family, are quite interesting, but after about the half-way point the book loses my interest. He mechanically lists results from tournaments after his prime that no one will remember. He spends several pages on the traits and personalities of the 4-5 dogs that he owns. Who cares?!

Also it's kind of a stretch for him to call himself an "outsider". He was an outsider to the tennis world as a child in East St. Louis, but by the time he was a teenager he was surrounded by LA celebrities and had Pancho Segura as his coach.

Jul

17

Re: Immigration

If Abenomics is a Japanese response to a fear of Chinese domination, I agree they could best address those fears by offering stable rule of law and entrepreneurial opportunities to skilled Chinese/Korean immigrants rather than by debasing their currency. The non-linear multiplier effect of importing top talent from China would be nearly equivalent to the outsized positive effects of the Jewish diaspora in the US.

Indeed two of the 33 Japanese billionaires are "Zainichi" Korean-Japanese. Could new blood itself inject dynamism? Perhaps. But the biggest problem with unskilled immigration in a welfare state is the importation of labor with insufficient human capital to generate taxable productivity to cover future entitlement liabilities.

Westerners propose immigration as a panacea solution to Japan's demographic "problem," but ignore the root cause: the government's pay-as-you-go transfers to the elderly. The fertility rates of East Asians are as follows:

Asian-Americans 1.7

Japan 1.4
Korea 1.2

Hong Kong 1.2

Singapore 1.2

Taiwan 0.9

This implies that without reform of the welfare system, immigration will simply delay the problem as unskilled immigrants will likely require outsized old age benefits without producing the necessary number of children to pay for them. Immigration works best in a system like Singapore's and 19th/early 20th century US's in which there's a match funded welfare system or little welfare at all.

So the real cause of Japan's troubles really does not stem from demographics, but from the burdensome Ponzi scheme social security system. As any consumer or commuter in Tokyo can tell you, the problem isn't a lack of inflation or lack of people. A Japan with half as many people would improve the quality of life tremendously provided a deregulated economy could maintain productivity growth.

Deregulation and reforms (as you alluded to) need to focus on the labor laws, which make firings impossible, the various cartels, and the misallocation of human talent towards bureaucracy. On the last point, it seems a terrible waste to take the most talented elite of a generation and stick them in unproductive government jobs so that they can reap the reward of a sinecure upon retirement at the firms they previously regulated (amakudari).

Jul

17

I recently read the article "At Sears, Eddie Lampert's Warring Divisions Model Adds to the Troubles". My friend sent it to me with the subject line "is Ayn Rand destroying Sears?!"

Obviously this sort of article is biased towards taking a crack at a huge success like ESL that's meeting with a tough spot. But is raises some interesting points. Doctrinaire belief systems always fall apart when taken to extremes. I guess it is Soros' 'competition vs. cooperation' debate.

The time frame of hedge funds is trickling through the whole of society. Given life contains an inevitable sequence of errors and that the current measurement system allows for zero error, it is perhaps inevitable that within a corporation you will be cut and cauterized at some point. Buffett, Ackman, ESL, etc. would presumably all have fired themselves at various points of setback. And when you get cut from somewhere like Sears, you lose all the "clients" that you've spent a career building and have no entrepreneurial base from which to direct yourself mid-career.

Is this "time frame" a strong argument for encouraging your children to pursue the diversified/entrepreneurial approach going forward? The zero-error expectation and threat of career termination is a key factor in pressuring staff at certain financial firms to do unsavory things.

Gary Rogan writes: 

The first thought that I had after reading the article was that typically there is no "algorithm" that one can come up with that works long enough, consistently enough, and is platform-independent enough to be declared an algorithmic success story when dealing with complicated problems involving a lot of people. Any kind of attempt to manage lots of people by a relatively rigid and relatively simple algorithm will fail, and it will be even worse if the algorithm is rigid and complicated. You have to have some system, but the system always requires human intervention by some very smart humans. If the human is highly eccentric (and these are over-represented among those who start things) the results are usually highly unpredictable and uneven although always entertaining, yet people like Howard Hughes and the rest of eccentric billionaires prove that they are not always unsuccessful.

It is absolutely true that in the modern age two-way loyalty between the corporation and the individual has gone out of style, so anyone who is not independently wealthy should be prepared to have skills to sell at any moment. What ESL evidently did at Sears seems almost cruel though, like experimenting on live humans after offering them a big enough incentive, but it's certainly not unethical as they were all big boys and girls and should have known who they were dealing with.

Jul

17

Hi Vic,

I continue to learn a lot about subtle aspects of my thinking/decision making process that presumably in the past has diluted whatever skill I may have in analyzing publicly available information.

My vehicle is an experimental stock portfolio that is diversified with about 32 stocks, no margin, always fully invested. Benchmark is the Russell Small Cap Growth Index.

Of the 522 mutual funds categorized as small cap growth, the number one ranked fund had a 1-year return through June of 34.4%. The experimental stock portfolio achieved a return of 34.3%.

I plan on periodically posting performance results on my website to cover a five year time horizon which began Jan 1, 2012.

Also, I'll be publishing an SSRN working paper discussing the details of how one can use the experience of managing money to uncover problems in how we perceive the world. I have found Perceptual Control Theory to be especially helpful in this regard.

Jul

16

I have a distant relative who was a turn of the century painter, and several years ago I found one his works with a dealer in NYC. I spoke with him about my family connection and the piece definitely did speak to me. It was priced however twice what I was willing to pay and I had a very specific number in mind that was my maximum. I was fairly knowledgeable about this specific artist. After our twenty minute conversation I asked him his best offer price. Incredibly, he dropped the price to the exact the number I had in mind with no haggling on my part, a nearly 50% reduction. I could have countered lower, but decided to accept. The dealer sized me up very well and a market was made. Perhaps I still overpaid, but I consider this a good transaction for all.

Jul

16

Noticed on the news Russia is returning to the manual typewriter for sensitive secret documents.

I still have my Tom Thumb with metal cover from my youth. Also my Tom Thumb cash register. A Royal typewriter that was my Grandfathers and a cased Underwood Olivetti that Grandpa gave me at 12 years old.

Any of you still have an older typewriter?

Regards,

Alan

Peter Saint-Andre writes:

I've been thinking about a return to older and slower technologies as the premise for a science fiction story: typewritten documents, longhand letters, postal mail, printed books, surface travel, pre-GPS vehicles, etc. Not that I've written any science fiction stories to date… ha.

Jul

11

This article from Chicago Booth School of Business may be of interest. "The HFT Arms Race: Frequent Batch Auctions as a Market Design Response", [67 page PDF ] by Budish, Cramton and Shim. What would Milton Friedman think?

Alex Castaldo summarizes:

In the 19th century, the Paris Bourse held two stock auctions a day: one in the  morning and one in the afternoon.  That is probably too slow a tempo for modern life, but the current continuous auction mechanism is not necessarily the best setup. The authors propose that auctions be held electronically every 1 second.  This has the effect of nullifying the effect of minor (millisecond range) speed advantages, and allows a "thicker" market in which it is not only the quickest buyer and the quickest seller who interact, but a larger group of buyers and sellers. The authors claim this would allow smaller spreads and benefit the fundamental investor at the expense (presumably) of the short term market makers and arbitrageurs, as well as suppliers of high speed communication lines.

As always with this kind of proposal, we have to watch out for unintended consequences, which may not be so easy to discern. 

Jun

28

I was a hotshot kid from the Bronx and I had successfully completed two tours– 52 missions in all– as a combat navigator routing out Nazis. I had, all 52 times, beaten the highest combat rate of attrition in WW2–71%. That is, each time I went out I had a 30 or so % chance of coming back. My squadron commander was Col. Jimmy Stewart, who flew a spate of missions but not with me. Twice our plane, Sweet Sue, had led the entire 8th Air Force, once against Berlin, once against Hamburg, 1100 and 800 planes. I was 22 and volunteered for a third tour, taking the wounded home from islands in the Pacific between Australia and Japan.

I was determined to become a great writer from the time I became addicted to reading at James Monroe High School in the Bronx. My immigrant father, Herman Shay, had entertained the same hope for himself, but at 25 in Russia, he was befriended by Leon Trotsky and had a falling out with him. He came to America and ended up in the family trade, a semi-employed tailor during the Depression who taught me chess and gave me a lifetime reverence for Chekhov, Tolstoy and Hemingway. He taught me to be a mensch and how to forgive. And as a Bar Mitzvah present in 1935, he gave me his folding Kodak.

In Paris, hours after the war ended in 1945, I duplicated with my Leica the picture my father made of himself with the Kodak, with the Eiffel Tower behind him in 1905. I see photography as an extension of literature. I sold features to The Washington Post while stationed at the Pentagon. I had turned down jobs at Look and the Post and took the Life job as a reporter when Joe Thorndike, then editor of Life, pointed out Life had recently hired some 20 refugee photographers –guys like Eisenstaedt. He liked the story I had written about my plane crash and said he'd like to hire me to work with Life Photographers to help them do stories and to schlep their gear. Surviving a flying-blind plane crash in Newfoundland had put me in contact with Life and Look.

I went to work for Life and became their youngest Bureau Chief ever. Went to San Francisco when I was 26, and lasted three years on the staff before I went out on my own in 1951 in Chicago. I had learned and practiced my craft of photo journalism in NY, Washington, SF, and then Chicago, where Florence and I settled with our two, then five, kids.

I had worked with two score of the best photographers in the world on some 70 stories. A reporter on Life in those days was an idea man too. I did some 70 stories before I picked up my own Leica for real. First year out I made $30,000, second I did 60. By my third year I had more work than I could handle. My client list included Time, Life, Fortune, The Saturday Evening Post, Forbes, Business Week, CBS, Ford, NBC, Baxter Labs, Amana, National Can and the Blue Cross. In 1954 came Sports Illustrated.

I refused to specialize– the long lenses I got for my SI work I used in staking out the Mafia– some 60 times, often using my late, beautiful wife, Florence as a decoy or fotog with a camera in her purse. She became a successful international rare book dealer and some of her clients became my friends too, and collectors of my pictures: David Mamet, Joseph Heller, various governors, rock star Billy Corgan– who sang at her funeral last year.

My favorite mentor on Life was Francis Reeves Miller, who looked like W.C. Fields and gave me the nickname of "DeMille" for "directing" certain difficult Life pictures. Like getting together the 17 congressmen and senators who had vainly introduced legislation that would fight the Dairy Lobby's greatest achievement– keeping the American housewife from buying factory colored margarine. It was to their advantage to keep Mrs. America buying white marge then coloring it at home with dye from a little bottle. Picture ran a full page and helped end the Lobby's hegemony.

My photo philosophy has always been if there's a way to tell the truth, show it in pictures. The only no-no was bad taste or corn, like showing a mouse succumbing to an ingenious new trap. It wasn't the kind of thing Life readers wanted to stomach with their breakfast.

Francis Miller always said my greatest achievement was "Life Crashes a Party". The party I picked? The Hungarian Ministry's celebration of the 100th Anniversary of the Hungarian Ides of March. Best picture? I maneuvered the Ministry's buxom charge de affaires (our crasher's "date") in her low-cut blouse into leaning over the table of Hungarian goodies flown in from Budapest that very morning. Under her bosom, describing the tidbits, was a sign that said, "Hungarian Delicacies." If a picture was on the racey side and had a double meaning, Life would sometimes use it. Working for Life, in which I had 900 pictures ultimately as a photographer, was like channeling Mel Brooks playing for the Yankees.

Jun

24

MUB has dropped from 4% return in 2013 (as of may 1) to Negative 4% as of yesterday. This is creating a liquidity issue as ETF can't return cash as quickly as ETFs are being redeemed, and so in kind redemptions are occurring. We had been warned that mispriced debt was going to reverse quickly once the FED gave indications they weren't about to keep up their manipulations, and of course, China, which also needs cash might be selling a few treasuries to deal with the need for cash. When the rich man in Brazil has to sell equity for pennies on the dollar in private transactions, it's time to pay attention.

Jun

24

If you have read the book Why Stock Markets Crash, the author has a very good section on the growth stock paradox in negative interest rate environments, as originally highlighted by Von Neumann in 1938 when t-bill yields went negative as money fled Europe to get away from Hitler.

Mathematically, anything with a positive yield takes on an infinite value, however, the math allows for two solutions U and - U both balance. When the charge on a magnet changes, there are large effects. The Fed papers call these regimes "Jump Dynamics." QE has created the same environment for carry trades. I believe the Fed has increased the probably of Jump Dynamics. LTCM went about 4 years up Feb 1994- Feb 1998 and was out of business by the end of August. QE turned 4 this past March and since May markets have begun reversing all convergence trades which benefited from QE. Recall gold in Rubles, suddenly revalued in August.

Stocks may stablize yet, as they did the summer of 1987, but yields are moving like they did that year after trading in a low range. the prior year. There were two legs up in rates then.

The long term issue is this — stocks offer a compelling risk premium over cash at 0 as one might estimate them to now offer 6.25%, however, there are many environments in which stocks, in a free market, may offer compelling absolute values of 10-12% which would require a move back toward the lows.

In 1914 the markets made such a move back to the panic lows of 1907 with a six month halt.

Interestingly, book value of the S&P 500 in Barron's this week is 666.97. The Fed lent to AIG on the basis of its book value of $90 Billion at the time, did it also lend to the market based on a 4-5 year projection of book value at that low? I think so, as the bank assets have about a 4-5 life, and in 2009 cash buyers were bidding 30 looking for 20-25% in 4-5 years cash on cash because there was no leverage available, the banks said to the Fed, allow us to earn the equity Return and Bring book values up to our current marks at 70 (for the good banks).

This out of court bankruptcy restructuring of current rates to 0, making no net new loans, and riding equity value up to marks, has taken time, but now looks to be complete.

Where the markets really broken in 2009 or did the leveraged institutions just not like the prices. Market participants are expecting $110 in S&P earnings. This would require a 16% return on equity. A high hurdle for the market as a whole. If one actually checks the data one would see company's currently are earning about 13% in line with historical averages implying about $91 of normalized earnings power.

Jun

17

Who is this ubiquitous "public" of which we all speak?

You must know who I mean. The one that Bacon thinks the form always shifts against at the race track. The one that allegedly always loses in physical stock markets. The famed 'Mrs. Watanabe' in the JPY Carry Trade. The 'Belgian Dentist' (what the ???) in Fixed income Securities. Well, I think, in the modern world, the concept of a "Public", as commonly classified, is absolutely redundant.

1. Holdings of Physical Stocks by the 'Public' is now circa. ~ 20% (Excluding Mutual Fund Holdings)

2. Therefore, the public to which we refer (in stock markets) is actually an MBA from a Big Ten business school in the United States or Oxbridge/Insead in UK/Europe. These guys are the ones buying and selling.

Now I am not saying that these are better or worse investors than the "public" we all allegedly copper. It's just that their behaviour is different — more institutional.

The ecology of the market has changed substantially, even in the past 25 years since I have been involved. I read somewhere recently that BlackRock owned or controlled ~ 20% or 1 in 5 stocks… Now figuring out how they move volume and why might be better than focusing on the public.

I find it hard to even dignify the 'Mrs. Watanabe' classification. The allegation that investors and speculators in Japan are in some way more trend following in nature or more likely to "buy the high" than any other classification of investors/speculators is laughable.

In all fairness, there are one off anecdotes about large purchases at the highs of trophy items by Japanese investors but that has more to do with who has the money and when. The last five years have seen the G.C.C. countries & China buy everything way through the highs for trophy assets…They too shall sell the low in times to come…

Ed Stewart writes: 

I disagree.

You are only considering it from the viewpoint of time-weighted returns. The problem is that time weighted returns are make-believe from a actual IRR perspective. Money weighted returns are where the public's poor outcomes become most apparent. Investors underperform their own mutual funds by something like 2% a year or more, if I recall correctly. Significant under-performance even occurs in index funds. People also time their 401k contributions, etc. I would love to see data on how much contributions dipped or were canceled in late 2008 early 2009, only to be turned on 2 or 3 years later after the tremendous rally re-instilled confidence. There were undoubtedly a tremendous, outrageous losses during this period relative to the time weighted returns, which seem to suggest that "everyone has been made whole" which is far from accurate.

Jun

12

An edge can last a long time, but when a paper is published outlining a system with an edge, sagacious people note the edge and start trading that system and natural market forces move that edge to zero. We all know people who have shared their systems and their edge. Regrettably, I've given away a few myself. Once they're shared, in my personal experience, they tend to disappear quickly and may not reappear for a very long time. That's why I would no more give details of my methods than I would give perfect strangers a glimpse into the most private areas of my life. The only consistent edge is to pay the price to have exchange privileges, able to buy at the bid and sell at offers on the inside market. You won't get rich but probably won't get killed either. But then again, I should be talking…….Ceres decided to give me an auto da fe today, with musical accompaniment, and she used a cat of nine tails in 7/8 time.

Jordan Neuman writes: 

Hi Jeff,

Interesting note. I have found that edges go away even when I don't give them away — if I am paranoid, I would think I am in a Truman show. Others start talking about what I discovered eventually, and I also wonder if I discovered it because of what others have talked about previously. Thus, I am not sure if edges go away faster if you discuss them versus the null of not doing anything. I think it also depends on what the edge is…some like the January effect will last a long time because of tax arbitrage while others might fade to equity-like risk/reward and then lack the "natural market forces" to fade further.

Regards,

Jordan

Jun

4

Ross Miller died, unexpectedly but peacefully, in his sleep at his home in Niskayuna on May 20, 2013, leaving behind his wife of almost 34 years, Mary O'Keeffe, two daughters, Alison and Catherine Miller, a sister, Dr. Dinah Miller of Baltimore, and a large extended family, many friends, colleagues, students, and mentors.

A pioneer in the fields of experimental economics, artificial intelligence, and computer-aided financial analysis, he worked in both industry and academia, winning awards for his innovative teaching and financial research inventions from Boston University, General Electric R&D, and the University at Albany. Since 2004, he has been Clinical Professor of Finance at UAlbany, where he taught students in the MBA and Financial Analyst Honors programs. Fascinated by the inner workings of financial markets from an early age, he investigated financial frauds and deceptive practices and analyzed alternative market trading rules to avoid speculative bubbles and financial disasters.

His book What Went Wrong at Enron spent months on the New York Times business paperback best seller list in 2002. Other books, Computer-Aided Financial Analysis and Paving Wall Street: Experimental Economics and the Quest for the Perfect Market received praise from both academics and industry practitioners, and have been translated into Chinese, French, Italian, Japanese, and Korean. His research articles since 2005 have shined a light on excessive hidden fees charged by financial institutions. The Wall Street Journal, Money Magazine, CNBC, and the New York Times have highlighted his work, which has contributed to some industry reforms.

Born January 6, 1954 in Greenville, South Carolina, Ross was the son of the late Rabbi Milton Gerald ("Jerry") and Sara Stein Miller. Following a few years in Greenville and in Memphis, Tennessee, where his father was active in the civil rights movement, the family moved to Elizabeth, New Jersey. After graduating from Elizabeth public schools, he studied math, computer science, and economics at Caltech and Harvard, working with many distinguished scholars, especially Charles Plott and Vernon Smith, his lifelong mentors and collaborators in his seminal undergraduate research project. While at Harvard, he met his future wife, with whom he founded a consulting side business, Miller Risk Advisors, which they ran together.

Throughout his 59 years, he was a lover of learning and a creative and tenacious problem solver with a wonderful sense of humor, filling the family home with joy and laughter. His gift for cheerleading and inspiring others to believe in themselves and not to give up in the face of daunting challenges–whether his students, his wife, or their two homeschooled daughters–has left a remarkable legacy.

Memorial Celebrations will be held in July. Memorial contributions can be made to the Summer Program in Mathematical Problem Solving or to the YWCA of Northeastern NY More information will be shared at RossMillerMemorial.blogspot.com.

What is written above is the obituary that appeared in the print editions of the Albany Times Union and Daily Gazette on June 3. I am trying to preserve and piece together as many memories as possible, by going through photos and documents left behind and reading some of his prolific writings, especially his occasional commentary series, which you can find at this link.

I am writing a series of essays with photos about his life. There is a draft of a first one about his early years in this post. There will be more on later years on this blog. I am grateful for anyone who would like share memories. You can comment on this blog or reach me to share privately at mathcircle@gmail.com.

Ross was the love of my life. We met in September 1975, at the beginning of graduate school, both of us age 21. We married in July 1979. We were not just husband and wife, but partners in virtually everything we did together. I miss him more than words can say. 

Rossmillermemorial.blogspot.com

Jun

4

King Me, a film from ThinkMedia Studios of Cleveland, mirrors its subject. Like checkers, the film is filled with subtlety and punctuated with explosive moments.

Checkers is no simple game, and King Me is no simple movie. Humorous and serious, compelling and moving, writer/director Geoff Yaw has made a work of significance out of a game that few adults ever think is more than something for kids or old folks.

After watching King Me you'll never think about checkers the same way again. You'll experience a story about hope, courage, triumph and loss. It's Rocky and Cinderella and maybe even a little Chariots of Fire.

On one level, the movie tells the story of Lubabalo Kondlo, a black man from an impoverished South African township. Kondlo plays checkers at the grandmaster level, but due to disputes with white-dominated Mind Sports South Africa (MSSA), the national governing body for games such as checkers, he was blocked from competition on the international level.

Is the leader of MSSA racist? Or did Kondlo flout MSSA's rules? King Me strives to present a balanced picture, and herein lies one of the movie's subtle touches: you'll draw your own inevitable conclusions, but you'll draw them from the facts, not from a skewed or agenda-driven presentation.

Alan Millhone, President of the American Checker Federation, managed to pull international strings, line up sponsors, and break through bureaucratic roadblocks. Kondlo came to America to compete, and ere long he was the challenger for the world championship of what's known as "Go As You Please" (GAYP) checkers. This is the version of checkers that we all grew up with.

Enter Ron "Suki" King, reigning GAYP champion since the 1990s, a superstar in his home, the island nation of Barbados. King's personality looms large on camera; he's flamboyant and more than a little egotistical. But he's also very, very good. Challenger Kondlo was facing an uphill battle.

It's the classical underdog vs. establishment scenario. Kondlo is poor, short on resources, and struggling. King enjoys tremendous support from both government and business in Barbados. He's wealthy and confident.

Director Yaw makes real drama out of the 24 game King vs. Kondlo match. Can checkers keep you on the edge of your seat? You bet it can, and the emotional content in the match sequences is high. You'll find yourself cheering for the challenger, and you'll share his feelings when the match is ended.

Yaw and crew traveled to both South Africa and Barbados to film on location. The poverty of the South African townships and the lingering after-effects of apartheid come through all too clearly. The contrast with the sequences shot in Barbados is another of the film's subtleties. Barbados is hardly a wealthy place but Yaw captures the differences in a way that you can't help but notice.

There's a lot of color content about checkers, of course. Many of the "big names" in American checkers appear in the movie, although unfortunately a number of them aren't identified by name. Yaw portrays them as a largely eccentric lot. While there is certainly truth in this characterization, it seems overemphasized. Checker players, unlike chess players, tend to be of the man-in-the-street variety.

If you're a checker fan, King Me is an obvious must-see. If you know a little about checkers and want to learn what it's all about at the uppermost levels of play, watch this movie. Even if you're not especially interested in the game, but you enjoy real-life drama and are moved by the heights to which the human spirit can soar, there is much here for you.

Geoff Yaw has done extraordinary and unexpected things with King Me. A documentary about checkers? You're going to be amazed.

King Me can be rented or purchased from Amazon, iTunes, and VUDU.

Jun

4

"Sell in May. Go away" -Wall Street lore

"Rough winds do shake the darling buds of May" - Sonnet 18, Shakespeare

Like many of the Wall Street adages, there is always a bit of truth along with some misdirection. Looking recently since 1998 (n) buying at the end of May, the next four months are -10,-6,-12, -9 SP points on average, roughly 50% of these months are down with a few large negative moves. So the summer months are negative on average but not impressive on the downside. Also, if the holding period is a modest 12 months the effect becomes very muted compared to the profits of buying after most of the other months, shown in average SP points. (jan)15, (feb)18, (mar)14,(apr)15,(may)-5, (jun)-2,(jul)1, (aug)11, (sep)14, (oct)8, (nov)-4, (dec)-2

Maybe the advice should be "buy pretty much after any month if you can hold a year or more". But that is hard to rhyme.

Jun

3

The value of a reference text can be measured by how the reader applies or adapts the knowledge therein. The following work is regularly very helpful and a highly practical assistance to my speculations: Runs and Scans with Applications by N. Balakrishnan and Markos V. Koutras. (First published by Wiley in2002) 

I am ashamed to say that I bought the book just from the picture on the front cover (take a look — those interested in counting will understand what I mean) It hooked me immediately. Some of the chapter headings say it all: Chapter 2: Waiting for the first run Occurrence; Chapter 4: Waiting for Multiple Run Occurrences; Chapter 5: Number of Run Occurrences; Chapter 6: Multivariate run related Distributions, and so on.

Some of the things in the book are not relevant to financial time series analysis but much of it is. There are some fascinating real world applications also that can be adapted to transformed price data. Section 12.7 was particularly helpful and fascinating amongst so much else.

May

28

Aversion to losses or aversion to risk? Which of the two is addressed by willingness and ability to close out losing trades?

Well, without invoking mathematics where it is not necessary, it is common and logical to place on the table that when a losing trade is closed one has the willingness and aversion to the risk of the persistence of loss becoming into a bigger one and one does not have aversion to the present level of loss in being accepted.

Now on the other hand, unwillingness to stop out a losing trade is indeed loss aversion.

The computations that show that having utilized some sort of mechanical rules for stopping out adverse incursions actually increased the probability of meeting with adverse incursions is totally flawed abuse of statistics.

Several arguments:

1) Historical data analysis does not undertake the "uncertainty at a given moment to decide upon" into account and is definitely incorporating hindsight 20:20 vision mind-set.

2) Any measurements of uncertainty and thus risk are never definite, since measurement of uncertainty too will be having an uncertainty of its own. So a trader in the middle of a losing trade has to decide that the level of uncertainty in his method, mind or cognition regarding the calculation of the "value of uncertainty" in his trade has become too high for him to handle. That's where humility, the currency that prevents others from profiting more from your mistake, can come into play and allow the willingness to hit the stop.

3) However, when either with or without the illusions of statistical computations of stop losses increasing the probability of meeting with more losing trades, one fails to control the human weakness of loss aversion, to somehow and anyhow turn that loss into a profit, one is becoming totally risk-insensitive. From skill, the turf changes to the power of prayer. The game begins to change from action to hope. Inconsistency of thoughts thus turns one into a trader who is continuing to hold on to risk without a mental apparatus to assess it or react to it. As the loss continues to grow not only the lack of willingness to take it hurts, the ability to accept the increasingly bigger loss also dwindles rapidly.

I am ready to be thrown before any firing squads of mathematical minds and ideas on this list if they can with or without numbers help me learn how come this list celebrates and cherishes a human value of humility and yet indulges in an idea that staying on in a trade that has incurred a level of loss greater than anticipated when the trade was opened are mutually consistent.

I would close my submission for now with one thought:

When loss aversion creeps in it makes a decision system (mind) risk-insensitive and with no respect for risk, returns are impossible. Yet, if a mind continues to be risk-averse it does not have loss-insensitivity and in humility such a mind closes out risk that has turned out to be less than comprehensible.

Phil McDonnell responds: 

Since I am the well known culprit I shall give Mr. Kedia a reply. If the probability of a decline art the end of a period of time equal to your stop is p then the probability of losing the stop amount with a stop loss strategy is 2 * p. It is simply a derived relationship. It is what it is.

It is not a misuse of statistics but rather a description of how a stop loss exit strategy will change the distribution of returns. Larry Connors studied over 200,000 trades from a winning system and compared the results with and without stops. He found the use of stops increased the probability of loss and reduced the expected gain.

In my opinion the best way to trade is to reduce position size so that no one loss hurts your account too badly. That means many small positions to me.
 

Larry Williams adds:

Ahhh here I go off on a rant; please excuse a tired old mans bitterness at system vendors who claim stops hurt performance.

Yes, they are correct in that the statistics of your system will look better if one) you don't use a stop and two) your use a market with a perpetual upward bias like the stock indexes have been, usually.

They are absolutely totally incorrect in terms of living the life of a trader. So what if I am long in a position that eventually shows a profit but because I did not have a stop loss that one trade moved against be 20,000 or $30,000 and it took a year or so to get out of? Yeah, the numbers look good (high accuracy) with no stops but it's one hell of a lifestyle.

High accuracy is a false God.

Consistency and never being in a place where you can get killed is more critical. Perhaps Mr. Connors has never sat through the reality of a large loss, especially in a large position. I have; I would rather battle the devil at midnight on a new moon with both hands tied behind my back.

It's one thing to have a system with "good numbers" it is quite another thing to be a trader and have to deal with reality.

It only takes one bullet in the chamber to kill you when playing Russian roulette. As near as I can tell trading without any stops, in any way whatsoever, is just the American version of this form of spinning the wheel.

Play the game as you wish but please heed the warnings of an old man.

Leo Jia adds: 

I have been studying the use of stops. Due to loss aversion I guess, I would like to use narrow stops. But among the various strategies I have yet found one working well with narrow stops. Good stops have to be relatively wide in my cases, but having no stops or stops that are too wide clearly hurts results (my trades are time limited). So a good choice for me is to size the position according to the stop size.

Sushil Kedia writes: 

If you reduce position size can it be argued that a position of Size N reduces to N-n implies that you took a stop loss on n lots out of N you held. Then too, it validates the fact that you do take stops.

Anatoly Veltman writes: 

Larry covered main bases (different markets, different position sizes, different lifestyles) pretty well. I just want to be sure that reader doesn't end up with wrong impression. I think the best conclusion is "it depends".

And because my act follows Larry's (who is certainly biased in favor of stops), let me try this. If you enter based on value (which is certainly against trend), then there is no justification available for a stop. Unless you argue that this stop proves you were an idiot on the entry. But if you are an idiot on value entries, then why play value…

Anton Johnson writes: 

 The problem with using Conners' simulation as evidence that placing a trade stop-loss reduces returns is that he tested a winning system that likely had never experienced any 5-sigma negative excursions prior to the test date. And of course there are no guarantees that his strategy, or any unbounded trading strategy, will perpetually avoid massive drawdowns.

When implementing a strategic trade, a good compromise between profit maximization and loss mitigation can be achieved by balancing trade size along with a stop-loss, which when placed at a level that only an extreme event will trigger, will likely contain losses to a predetermined range, and also prevent getting stopped-out of a potential winner. If one is disciplined, maintaining a mental stop-loss level is preferable to an order pre-placed in the book, and available for all the bots to scan.

Larry Williams adds: 

But speaking of stops, I go back to my litany, my preaching the essential reason for never putting stops on an exchange server, or even your brokers server. Putting stops on servers means that your stop becomes part of the market. And not in a positive sort of way either. Pick a price, hit the button, and take the hit. Discipline is key here.

Ed Stewart writes: 

A trader needs a decision process for managing the expectation or expected value of the trade as well as the equity position. The problems occur when these two things are in conflict.

The thing with stops is that at times it makes no sense to get out of a trade when the expected value is still good. What is the difference between exiting at a small stop-loss point 4X in a row vs. one loss of that same size? Well, if at each "stop out" point the expected value was favorable, it makes no sense, one is just locking in losses. At times the best "next trade" is simply staying in the current trade.

However, I see Larry's point and it is a good one. Yet, the example of letting a loss get huge or holding an underwater position for a year is to me something of a false alternative. No exit strategy but hoping for a profit at some point is not a reasonable alternative.

What maters, I think, is the expected value of the trade at each moment, and balancing that against equity and a margin or error to ensure, "staying in the game".

Given this I always trade with mental stops, if not on individual positions, on total account equity. Having that "self-preservation" discipline is useful.

Jeff Watson writes: 

I learned very early on in the pit on how to go for the stops, and that weaned me off of stops completely (except in my head).

May

28

PJM capacity auctions for the post smokestack-era shows coal did not exit the market as many expected. Approximately 15,500 MWe more capacity show up than was needed (equivalent to 15 - 20 nuclear power plants). Of the 15,500 MW, 10,000 MW was coal.

In my opinion, this is huge. Power producers paid billions to upgrade their coal units to comply with EPA's new regulations effective 2015. Many of those units failed to clear the auction. Companies like Exelon gambled most these units would avoid the capex and exit the market. Companies like NRG Energy gambled ROI's on additional capex for older coal units would pay off. Both companies may have miscalculated, at least for 2016.

The aggregate loss in the PJM market is over $4 billion (when compared to the previous year). This loss is only for 2016. Subsequent years are unknown.

The President of the Old Speculator's Club, Jack Tierney, writes: 

Germany already has one of the highest per capita carbon footprints in the EU, largely driven by its use of coal. Phasing out nuclear will increase coal use significantly. Germany is building new lignite stations without prospect of carbon capture and storage (CCS). These are the worst possible policies from a climate change perspective.

German policy, with a nuclear moratorium and a move to more coal but without mitigating CCS, seems short-sighted and parochial. It undermines the EU position on climate change issues, already weakened by the shortcomings of its flagship emissions trading scheme.

A good article about it.

Additionally, CBI is supposedly lined up to do a significant amount of work in constructing new gas-to-LNG plants - a major reason it has moved up substantially this year.

May

24

I read Power Foods for the Brain by Barnard, MD (not sure how accredited he is) over the weekend

He basically lauds a vegan diet–fruits, vegetables, grains, and legumes only.

Points of interest:

1. He says amyloid plaques rise and fall circadian style. Plaques drain from the brain into the cerebrospinal fluid when sleeping, allowing the brain to cleanse itself and recover. When we don't sleep properly, by watching the late show, late snacks, getting up to check the markets, thinking during the night, etc, we are allowing the plaques to stay up and active, basically doing damage to our brain and memory cells.

2. He says people are getting too many minerals in their bloodstreams. Patients have more iron, zinc, and copper levels than non–memory impacted patients. People should be getting minerals from vegetables over supplements. Minerals are in many fortified food products like Total cereal, and too many minerals should be considered as leading to memory loss.

3. All tastes are acquired, except for breast milk, therefore you can reprogram your tastes from unhealthy food to healthier fare. 

4. Exercise, eating less to no meat and dairy, and engaging your mind in learning activities helps your brain and memory to stay intact longer.

Overall not much new here, but a good book for reading by the pool.

An editor suggests:

I would suggest the book 80/10/10 by Dr. Doug Graham to anyone looking to improve their diet. It is a diet about eating fruits, vegetables, leafy greens, and a few nuts, avocados and fats. By following this for a week to a month (I was increasing fruits for about a month, but eating only fruits and greens for breakfast and lunch for about a week) I got rid of my cramps which had been getting worse for years. It was astounding. It is considered the be all and end all healthy diet book in vegan and raw food circles. 

May

22

It only took the bonds about 1/2 hour to conclude that continued expansion of the fed balance sheet and buying the bad assets of their colleagues and clients was inflationary.

Rocky Humbert replies:

I respectfully disagree with the Chair's interpretation of Mr. Market's belief. I am sitting here watching the TIP market … and it's not inflation expectations that are rising, rather it's the REAL YIELD. (An economist would say the real yield is a function of the real growth rate, the risk premium for default, and competition with other investments…. so it's Mr. Market saying growth is ahead, not inflation.)

Inflation expectations as measured by the TIPS market continue to tick downwards, not upwards…

(Am waiting for George Z. or someone else to say that the TIPS market is a BS market signal because ….blah blah blah)

Please wake me up when the real yield on the 10yr tips goes positive. Looks like it's at least 3 or 4 points away.

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